Year-End Tax Strategies
By: Tax Hotline
Fall 2021 (Vol. 39, No. 3)
It’s that time again. Check these year-end tips and act before December 31 to maximize 2020 tax breaks.
If your qualifying expenses are more than the standard deduction, ($12,550 if you are single, or $25,100 if you’re married filing jointly) you can itemize your deductions for a lower tax bill. If you are close to that threshold you may be able to pay some 2022 expenses in 2021 so you can itemize. This is referred to as bunching. Instead of taking the standard deduction every year, in alternating years, you avoid or defer paying deductible expenses to stay below the standard deduction amount because you will get the same standard deduction regardless of what you spend. Pushing more deductible expenses into the next year when you have enough expenses to itemize.
DEFER OR ACCELERATE YOUR INCOME
Income is taxed in the year it is received. It’s difficult to delay a paycheck but you may be able to arrange some of your income. For example, if you are planning an IRA withdrawal or getting a year end bonus, you may be able to delay that into 2021. Benefits include avoiding a higher tax bracket or staying below the income threshold required for taking certain deductions.
If you are self-employed you may can delay billings until late December, for example, to ensure that you won’t receive payment until the next year. You may also defer income by taking capital gains in 2022 instead of in 2021. This strategy works for those who will be in the same or a lower tax bracket next year. Don’t do it if the additional income could push you into a higher tax bracket in 2022.
If you expect 2021 to be a low income year but think 2022 will be much higher, you may want to accelerate income into 2021 so you can pay tax on it in a lower bracket sooner, rather than in a higher bracket later. If you are in that boat, this is a good year to take capital gains and any withdrawals you have been planning.
TAKE ADVANTAGE OF ANY AVAILABLE DEDUCTIONS
Here’s a few to consider:
Contribute to charity. If you take the standard deduction, you can claim a deduction of up to $300 for single filers and $600 for married filing jointly for cash contributions to qualifying charities. If you itemize, you can deduct contributions equal to up to 100% of your adjusted gross income. You can double your savings by donating stocks instead of cash. You get a deduction equal to the full market value of the asset plus you avoid capital gains on the sale of the stock.
Sell loser investments. If you expect to owe capital gains tax this year, it’s a good year to sell off any loser stocks, mutual funds or real estate. You can then use those losses to offset your taxable gains. Losses offset gains dollar for dollar. Also, if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income. If you have more than $3,000 in excess loss, it can be carried over to offset income in future years.
Maximize your retirement contributions. For 2021, the maximum allowed for a 401k is $19,500 or $26,000 if you are age 50 or over. For IRA’s, you can contribute a maximum of $6,000 plus an extra $1,000 if you are 50 or older. If you are self-employed, you might consider a SEP IRA or a Keogh plan. Your retirement account must be established by December 31, but contributions may still be made until the tax filing deadline (including extensions) for your 2021 return. The amount you can contribute depends on the type of Keogh plan you choose.
Maximize your Health Savings Account contributions. For 2021, the annual limit on HSA contributions is $3,600 for self-only and $7,200 for family coverage.
Bunch Medical Deductions. In order to claim a deduction for medical and dental expenses, they must exceed 10% of your AGI. If you are close to that threshold, and have the funds, you may want to prepay for next year’s medical procedures. You may be able to prepay for physical therapy sessions or other medical treatments. Don’t forget expenses like braces, dentures and vision expenses such as laser surgery and contacts are also qualifying expenses.
REVIEW MINOR CHILDREN’S INCOME
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.
DON’T FORGET REQUIRED MINIMUM DISTRIBUTIONS (RMDS)
You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 72 (70 1/2 if you reached 70 1/2 prior to January 1, 2020). These requirements were suspended for 2020 but they are back in force for 2021. Failing to take out enough will result in a 50% excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year. RMDs apply only to traditional IRAs. If you have a Roth IRA, the original owner doesn’t have to make withdrawals.
REVIEW YOUR FLEXIBLE SPENDING ACCOUNTS
If your company offers a flex plan, the money that goes into has a use it or lose it deadline. If your use by date is year- end, you may want to stock up on medical supply purchases or schedule those appointments you have been putting off to use up those funds.