Most people start to think about their individual taxes around the time they receive their W2 from their employer. But getting started before the holidays can save you money and help make sure you aren’t ignoring something that could save you money in the future. Here are 12 things to consider as 2021 comes to a close, but keep in mind that not all tax situations are equal and many require individualized advice. For help with your specific situation, reach out to us at firstname.lastname@example.org.
1. Maximize Health Savings Account Contributions – If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions, even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible, or nontaxable if made by your employer (within IRS-prescribed limits); earnings on the account are tax-deferred; and distributions are tax-free if made for qualifying medical expenses. However, only medical expenses you incur after you establish an HSA are eligible for tax-free distribution. It is possible for an HSA to become a supplemental retirement plan if the funds are left to accumulate.
2. Don’t Forget Your 2021 Minimum Required Distributions – If you are 72 or older, you are required to take minimum distributions (RMDs) from your IRA, 401(k) plan, and other employer-sponsored retirement plans. If you are still working, distributions from your current employer’s plan can be postponed in some circumstances. Failure to take a required withdrawal can result in a 50% penalty of the amount of the RMD not withdrawn. If you turned 72 in 2021, you could delay the first required distribution to the first quarter of 2022, but if you do, you will have to take a double distribution in 2022, the one for 2021 and the 2022 RMD. Carefully consider the tax impact of a double distribution in 2022 versus a distribution in both this year and next.
3. Take Advantage of the Zero Capital Gains Rate – There is a zero long-term capital gains rate for those taxpayers whose taxable income is below the 15% capital gains tax threshold. This may allow you to sell some appreciated securities that you have owned for more than a year and pay no or very little tax on the gain.
4. Increase IRA Distributions – Depending upon your projected taxable income, you might consider taking an IRA distribution to add income for the year. For instance, if the projected taxable income is negative, you can take a withdrawal of up to the negative amount without incurring any income tax. Even if projected taxable income is not negative you might want to take out just enough to be taxed at the 10% or even the 12% tax rates. Of course, those are retirement dollars, so consider moving that money into a regular financial account set aside for your retirement. Also be aware that distributions before age 59½ are subject to a 10% early withdrawal penalty.
5. Sell Poor-Performing Stocks – Although the stock market has been performing well recently, you still may have stocks that have declined in value. If you sell them before the end of the year, you can use any losses to offset other gains for the year or produce a deductible loss. The net capital loss deductible on a tax return is limited to $3,000 ($1,500 if filing married separately) for the year, but any excess loss carries over to future years. You can repurchase stock in the same company for which you sold shares at a loss after 30 days have passed and avoid the wash sale rules.
6. Don’t Waste the 2021 Annual Gift Tax Exemption – You can give $15,000 each to an unlimited number of individuals in 2021. Taxpayers and their spouses can use their gift tax exemptions together to give up to $30,000 per donee. For example, if you are married, have four children and four grandchildren, you can remove $240,000 from your estate tax-free this year. The transfers also may save family income taxes when income-earning property is given to family members who are in the lower income tax brackets.
7. Bring in Some Additional Income – If your income and tax situation is such that you do not need to file for 2021, don’t overlook the opportunity to bring in some additional income, to the extent it will be tax-free. For instance, if you have appreciated stock that you can sell without incurring any tax, consider selling it, or perhaps take a tax-free IRA distribution if you are 59½ or older, or if younger and qualify for an exception to the “early withdrawal” penalty.
8. Take Advantage of IRA-to-Charity Transfers – If you are 70½ or over, you can request that your IRA trustee directly transfer funds from your IRA to a charity. Although not deductible as an itemized charitable deduction, the distribution is not taxable. If you are 72 or older when the IRA to charity direct transfer is made, the distribution can count towards your required minimum distribution for the year. This also reduces your AGI, which in some circumstances can reduce the amount of taxable Social Security income. There is no minimum charitable distribution, but the maximum amount per individual is limited to $100,000 per year. There are some complications if you are 72 or older, have earned income and make a contribution to the IRA.
9. Maximize Tax-Deductible Medical Expenses – If you have outstanding medical or dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of the adjusted gross income (AGI) floor for deducting medical expenses, or if adding the payments would put you over the 7.5% threshold and you are itemizing your deductions. You can even use a credit card to pay the expenses, but you should weigh the interest you’d incur if you don’t pay off the card right away against the tax savings.
10. Make Business Purchases – You can reduce taxable income by making last-minute business purchases, including office equipment, tools, machinery, and vehicles and write them off, provided you place the item into business service by the end of the year. However, you must consider the impact that expensing the items will have on your taxable income. Feel free to reach out to us before making any last-minute business purchase.
11. Increase Charitable Giving – 2021 is the final year that the normal 60% of adjusted gross income (AGI) limit on cash contributions has been increased to 100%, giving those with the means and the desire to increase their normal charitable contributions and deduct them as an itemized deduction. The normal five-year carryover applies to any excess over 100% of AGI.
Those who don’t itemize (currently about 90% of income tax return filers), are allowed to claim a deduction of up to $300 ($600 on a joint return) for cash charitable contributions made in 2021. Normally, only itemizers can deduct their charitable contributions.
12. Take Advantage of Energy Credits – Two of the major green credits are the solar tax credit and the electric vehicle credit. The solar credit for 2021 is 26% of the cost of the installed solar system, but the system must be complete and functional before year’s end to claim the credit in 2021. The credit is not refundable, and any excess has a limited carryover. The credit for electric vehicles must be determined from the IRS website since credit begins to phase out once 200,000 of the vehicle type by manufacturer has been sold.
Every individual tax situation is different. To discuss how these strategies and others not included in this article might provide you tax benefits based upon your tax circumstances, or if you would like to schedule a tax planning appointment, reach out to us at email@example.com.