1.     Long-term Capital Gain Sales – depending on your taxable income (see chart on last page), consider selling stocks held longer than one year (long-term) sheltered by the 0% tax rate, if applicable. 

2.     Gifting Appreciated Stock – Gifting of appreciated stock is a great way to help your favorite charity or church without having to recognize the gain on the sale of stock.  The IRS allows for taxpayers to donate appreciated securities and deduct the fair market value of the security without having to recognize and pay tax on the sale of the stock. 

3.     Donor Advised Fund – If you are on the cusp of the itemized deduction or standard deduction threshold, you may want to consider a doner advised fund to make your charitable contributions in 2021. This will allow you to bundle your charitable contributions into one large donation, then allocate those gifts over several years.  We would then elect to itemize your deductions in the year of the donation to the donor advised fund and take the standard deduction in future years.

4.     Adjust Withholdings – If you claim too few allowances on your W-4, you may end up with a refund at tax time. If you claim too many allowances, you may have taxes due. To avoid this kind of surprise in your own filing, use the IRS tax withholding estimator to find out if you’ve been withholding the right amount.

5.     Max-out Retirement – Tax-advantaged retirement accounts (such as a traditional IRA or 401(k) plan) compound over time and are funded with pre-tax dollars. That makes them a great investment in your future. They’re also helpful at tax time, since any contributions you make to these plans lower your taxable income.

For the current tax year, the maximum allowable 401(k) contributions are as follows: 

·       $19,500 up to age 49

·       $26,000 for age 50+ (with $6,500 catch-up contribution)

For the current tax year, the maximum allowable IRA contributions are as follows:

·       $6,000 up to age 49

·       $7,000 for age 50+ (with $1,000 catch-up contribution)

6.     Max-out HSA – A Health Savings Account (HSA) is similar to a personal savings account which can be used exclusively for healthcare expenses.  To be eligible, you must be enrolled in a high-deductible health plan.  If you are enrolled in an HSA plan, consider maxing out your contributions before year end.  HSA plans can also be used as an alternative savings vehicle to invest in stocks and other investments. The 2021 maximum contribution is $3,650 for individuals and $7,300 for families, plus an additional $1,000 for individuals over the age of 55. 

7.     Required Minimum Distributions – All employer-sponsored retirement plans, traditional IRAs, SEP and SIMPLE IRAs require regular minimum distributions (RMDs) by the April 1 that follows the year you turn 72. Thereafter, annual withdrawals must happen by December 31 to avoid the penalty.  RMDs are considered taxable income. If you don’t take the RMD, you face a 50 percent excise tax on the amount you should have withdrawn based on your age, life expectancy, and beginning-of-year account balance.  If you don’t need the cash flow and would prefer not to increase your taxable income, you may want to consider a Qualified Charitable Distribution (QCD), directly from your qualified account to a public charity. However, you won’t get the charitable contribution itemized deduction. QCDs are limited to $100,000 per year and you can make a QCD gift as early as age 70 1/2.

8.     Harvest Investment Losses – Tax-loss harvesting is a strategy by which you sell taxable investment assets such as stocks, bonds and mutual funds at a loss to lower your tax liability. You can apply this loss against capital gains elsewhere in your portfolio, which reduces the capital gains tax you owe. In a year when your capital losses outweigh gains, the IRS will let you apply up to $3,000 in losses against your other income, and to carry over the remaining losses to offset income in future years.  The goal of tax-loss harvesting is to potentially defer income taxes many years into the future — ideally until after you retire, when you’d likely be in a lower tax bracket. This process lets your portfolio grow and compound more quickly than it would if you had to take money from it to pay the taxes on its gains.

9.     Flexible Spending Accounts (FSA) – FSAs are basically bank accounts for out-of-pocket healthcare costs. An FSA earmarks your pre-tax dollars for medical expenses, lowering your taxable income.  When you tell your employer how much of each paycheck to set aside for your FSA, remember you’ll pay taxes on any funds still in the account on December 31. Plus, you’ll lose access to the money unless your employer allows a certain amount in rollovers for the next calendar year.

10.  Kiddie Tax – Congress created the “kiddie tax” rules to prevent families from shifting the tax bill on investment income from Mom and Dad’s high tax bracket to junior’s low tax bracket.

·       For 2021, the kiddie tax taxes a child’s investment income above $2,200 at the same rates as the parents.

·       If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24.

So be careful if you plan to give a child stock to sell to pay college expenses. If the gain is too large and the child’s unearned income exceeds $2,200, they could end up paying taxes at the same rates as you do.

11.  Roth Conversion – consider a conversion of your traditional retirement assets (Traditional IRA, 401(k), SEP, SIMPLE) into a Roth IRA.  The conversion will create a taxable event in the current year but will continue to grow tax deferred in a more favorable and flexible type of retirement account.  Speak with your financial advisor to determine if this strategy would be beneficial for your situation.

Proposed Tax Law Changes – “Build Back Better” Proposal

Over the course of the year, President Biden, and members of Congress have put forth detailed proposals that, when put together, could result in significant changes to the tax code. On October 28th, President Biden unveiled a scaled back “Build Back Better” framework. On the same date, Congressional leadership released H.R. 5376, the “Build Back Better” Act, in support of President Biden’s new framework. It includes $1.75 trillion in proposed spending for social and environmental programs, and close to $2 trillion in revenue offsets, much of that in the form of new taxes. The spending proposals in this plan total approximately half of the amount outlined in President Biden’s original American Families Plan and in the House Ways and Means Committee tax package released on September 13th.

The “Build Back Better” Act received approval from the House on November 19. A vote is pending in the U.S. Senate to ratify the House bill, though some aspects of the plan could change. That would require reconciliation of the two bills between the House and Senate. While awaiting final action, understanding potential changes can help you prepare.

·       Increase the highest individual tax rate to 39.6%

·       Raise the state tax deduction from $10,000 to $80,000 to be included in itemized deductions

·       Limit the aggregate balances of retirement accounts including IRAs, Roth IRAs, deferred compensation, and defined contribution plans to 10 million.

·       Extend “wash sale” rules to crypto assets, foreign currency transactions, and commodities.

·       Add an additional 5% surtax on income that exceeds $200,000 in non-grantor trusts.

These are some of the proposals that may impact your personal tax return. 

Please let us know if you would like to schedule a time to speak with one of our partners on how to implement some of these year-end tax strategies or discuss how the proposed tax law changes would impact your current tax strategy if implemented (214) 741-6721