2021 end of year tax planning opportunities
With only a month left in 2021, this is a timely reminder that now is a good time to take advantage of some strategic tax planning before the end of the year:
- Charitable donations – If you’re charitably inclined, December is a good time to get in your donations for the year, if you haven’t already. Even if you normally use the standard deduction and therefore can’t deduct your donations, 2021 is a bit different. Thanks to temporary legislative changes, if you will use the standard deduction on your 2021 tax return, you can still get a deduction for up to $300 (if single) or $600 (if married) of charitable donations for the year. However, those donations need to be in the form of cash, check or credit card…they can’t be property or securities.
- Tax loss & gain harvesting – If you invest in stocks, bonds and funds in a regular taxable brokerage account, you may have sold some positions this year at potentially sizable gains or losses. If you so far have a large net gain for the year, perhaps see if you have other positions that could be sold at a loss to help offset those gains (i.e. tax loss harvesting). Or, if you have really low taxable income for the year, you may be able to sell for a gain some positions you’ve held more than a year and pay no tax on them (i.e. tax gain harvesting).
- Roth conversions – While not right for everyone, especially those who are already in high tax brackets, Roth conversions can help reduce your long-term tax bill. By “converting” money from your tax-deferred accounts to Roth accounts, you pay tax on the conversion now, but the converted monies will then grow and eventually be withdrawn tax-free. Since the year is almost over, you should have a good idea of what your total income will be for 2021. Using this information, you can figure out how conversions would incrementally add to your income and taxes.
- Tax withholding & estimated payment check-up – Now is a good time to take inventory of all your income for the year and all the taxes you have so far paid through withholdings or estimated payments. If you have thus far underpaid your expected taxes for the year, you can potentially withhold some extra tax from sources like IRA distributions or your last couple of paychecks. Or, you can make a 4th quarter estimated tax payment.
- Don’t forget Required Minimum Distributions! – 2020 was an exception in that Required Minimum Distributions (“RMDs”) were waived. That exception does NOT apply for 2021. If you have an account subject to RMDs, be sure to take the distributions accordingly.