9 Wise End-of-Year Tax Planning Tips
As the end of 2021 approaches, it is less likely each day that there will be any new legislation related to taxes passing Congress. With that in mind, and always watching for new laws, here are ten areas in which you can improve your tax situation considerablyi.
1 Gain/Loss Harvesting
Long-term capital gains carry a significantly lower tax rate than shorter term investments. IN 2021, the change in the makeup of Congress is resulting in many new proposals to increase taxes. While there is nothing in the works that is a change for this tax year, next year and forward could be very different. Consider harvesting long-term gains this year for future tax savings.
2 Roth Conversions
Roth retirement account contributions are made with after-tax dollars, and withdrawals in retirement are tax free. With expectations for higher tax rates in coming years, it could be a good time to make a change. You also may want to fill up a lower tax bracket for this year’s taxes. Converting some funds to a Roth and paying the tax could be a wise move.
3 Time Itemized Deductions
To get past the standard deduction or to maximize itemized deductions, by accelerating some deductions into this tax year or deferring some into next tax year, you may be able to improve your tax situation. This applies to most deductions including taxes, charitable donations, and mortgage interest.
4 Tax Bracket Management
With most of the news indicating rising tax rates coming in 2022 and beyond, it could be a good time to accelerate income and defer deductions for high income individuals. The idea is to move taxation of money into this year with lower tax rates than anticipated next year. Ideas include:
- Fast tracking a sale with profits.
- Accelerate bonuses.
- Defer loss harvesting.
- Roth conversion.
- Exercise stock options.
Look into your specific tax situation and consult with professionals.
5 Estate Plan Review
With the federal estate and gift exemption amount doubled to $11.7 million per person, and only until 2025, those with taxable estates should consider taking advantage of the increased exemptions through the use of lifetime gifts.
6 Maximize Pre-tax Qualified Retirement Plan Contributions
Save money on this year’s taxes by maximizing your pre-tax contributions to qualified retirement plans. Consider increasing pre-tax salary deferrals to employer-sponsored retirement plans. These include:
Do not forget contributions to IRAs for nonworking spouses.
7 Charitable Donations
Tax year 2021 presents an opportunity to save on taxes that will be significantly reduced in 2022. This year, taxpayers can deduct up to 100% of AGI, Adjusted Gross Income, the amount deducted to public charities. After 2021, this deduction will revert to 60% of AGI. Another approach could be to gift appreciated assets to charity. This would avoid coming increased capital gains tax rates.
8 Low Interest Rate Strategy
With interest rates hovering around historic lows but expected to increase in the near future, consider taking advantage of the situation through estate planning. If you expect a taxable estate, you may want to investigate an estate-freeze strategy. One example is a Charitable Lead Annuity Trust to benefit a charity and provide for noncharitable beneficiaries in the future. You would also get a charitable income tax deduction.
9 Review Investment Portfolio
If you are holding concentrated stock positions, you may want to investigate rolling them to take advantage of a soon-to-increase capital gains rate before the increase. Consult with investment advisors if needed to maximize current deductions and minimize capital gains.
Take all of these into account and discuss with your tax advisor(s) to see which could be of benefit in your situation.