I was really hoping for 2021 to be a much quieter year. It didn’t work out the way I had it planned!
COVID made a comeback (or two) and we are most likely in for some major tax law changes soon.
But there are still plenty of great year-end tax planning moves that you can make regardless of how the pending legislation turns out. Here are some things to consider.
Manage Your Adjusted Gross Income
Your Adjusted Gross Income or AGI is the government’s go-to number to determine if individuals make “too much” money and should not qualify for tax breaks.
You’ll find your AGI on the first page of your tax return. Deferring income to 2022, increasing contributions to deductible retirement plans and health savings accounts, tax-loss harvesting and qualifying education expenses (using the Tuition and Fees deduction) can all reduce your AGI.
Know the AGI limits on the tax breaks you want to qualify for and manage your AGI accordingly.
Stimulus Payments: As part of the legislation aimed to minimize the economic impact of the coronavirus, the government sent out two rounds of stimulus checks in 2020 and one in 2021.
These checks are not taxable and were sent out based on the AGI on your prior year's tax returns. The 2021 checks were $1,400 for each taxpayer and $1,400 for each qualifying dependent. For example, a couple filing married filing jointly with one dependent child would receive a payment of $4,200.
These payments are subject to AGI limitations. The payments phase out for married filing joint filers between AGIs of $150,000 to $160,000. For singles, the phase-out range is $75,000 to $80,000.
These limits will be based on your 2021 AGI. If you qualified for payments you have not received, you can claim the payments on your 2021 tax return.
Charitable Deductions: The 2021 standard deduction for married taxpayers is $25,100, $12,950 for singles. The cap on state, local, and real estate taxes you can take as itemized deductions is $10,000. This cap could be expanded under current legislation so work with your advisor to plan accordingly. These two facts mean that a much smaller percentage of the population will itemize their taxes every year.
If you are a giver to charities, bunching your charitable contributions may allow you to itemize in high giving years and take the standard deduction in lower giving years.
You can bunch charitable contributions by giving to your charities every other year or every few years. You could also use a Donor Advised Fund. A DAF allows you to make your contribution in one year (and take the deduction in that year) while deferring the timing of the donations to the charity.
To count on your 2021 taxes, checks to the charity of your choice must be in the mail by year-end. Contributions made on credit cards can be taken in the year you contribute. It does not matter when you pay the credit card bill.
If you can, donate appreciated property to charities. In most cases, you can deduct the full value, and you nor the charity pay taxes on the appreciation.
Don’t donate property that has declined in value since you acquired it. You’ll waste the capital loss that way. You are better off selling the asset, claiming the capital loss, and then donating the proceeds.
Required Minimum Distributions from retirement accounts were optional in 2020. RMDs were required in the year you reached age 70 1/2. The SECURE Act changed that. Now, if your 70th birthday is July 1, 2019 or later you do not have to take your first RMD until the year you reach age 72.
Consider making your charitable contributions from your IRA by making a Qualified Charitable Distribution. A QCD gets the money to your charity of choice, excludes the distribution from taxable income, and helps you meet your required minimum distributions. You can start using a QCD in the year you reach 70 1/2.
For 2021, non-itemizers can deduct $300 of cash contributions. The deduction cap is $600 for married couples filing jointly. A change from 2020 is that this deduction no longer reduces AGI.
Historically, the deduction allowed for cash charitable contributions was limited to 60% of AGI. That limit was eliminated for 2020 and 2021.
Medical Expenses: If you itemize and your medical expenses have topped the 7.5% of AGI threshold or are getting close to it, consider getting and paying for needed medical expenditures before the year-end.
Home Loan Interest: If you itemize, you can deduct mortgage interest on qualified mortgages up to $750,000 if you incurred the debt after December 15, 2017. Interest paid on mortgages for second homes can be deducted up to the combined $750,000 limit.
You can even prepay your January mortgage payment in December to add to your deductible interest.
Interest on home equity lines of credit remain deductible only if the loan proceeds are used to “buy, build or substantially improve” the home that secures the loan. Plan accordingly to maximize this deduction.
Tax Arbitrage: A very cool-sounding term for taking advantage of lower tax rates by deferring or realizing income when tax rates are lower. Traditional methods of tax arbitrage include deferring tax realization by postponing receipt of income through retirement savings and deferring Social Security and retirement plan distributions. You would only make these deferrals if you believed your income would be taxed at lower rates in the future – like at your retirement.
How will proposed tax changes affect the tax rate you will pay in the future? Consider this when determining if you should realize more income now or postpone it.
Retirement Planning; The temporarily lower rates created by tax reform also impact your retirement planning decisions. Based on your situation, is it better to invest in a Roth IRA and pay taxes now rather than deferring taxes using a traditional IRA? Should you consider converting a traditional IRA to a Roth and incurring the taxes on that conversion while rates are temporarily low?
Child Tax Credit: For 2021, the maximum child tax credit is $3,600 per child age 5 or younger and $3,000 per child between the ages of 6 and 17. The credit is refundable, so you don’t have to owe taxes to take advantage of the credit.
The maximum credits phase out quickly. The maximum credit phase-out for married filing joint taxpayers starts at $150,000 of AGI and caps at $182,000. Then the taxpayers can receive the lower $2,000 credit if their AGI is between $182,000 and $400,000. For singles, the phase-out begins at $112,500 of AGI.
If you received advance payments on your credit, those amounts will be deducted from the credit you can take on your tax return.
Planning tip: Social Security numbers must be issued before the due date of the tax return including extensions. Make sure you have Social Security numbers on hand for every child you plan to claim the credit for.
529 College Savings Plans: 529 plans have been a great way to prepare for college costs while saving on state taxes. Distributions from 529 plans can also cover up to $10,000 of educational expenses for designated beneficiaries at public, private or religious elementary or secondary schools.
Georgia allows an $8,000 state tax deduction per beneficiary for joint filers and $4,000 for all other filers. 529 plans are a great opportunity to reduce your Georgia taxes while making a lasting difference in the lives of others. In Georgia, you have until April 14, 2022 to make 529 plan contributions that will be deductible for your 2021 taxes.
Tax Loss or Gain Harvesting: If you have investments with losses that you’d like to sell, you can do so before the end of the year and take those losses on this year’s taxes.
If you have loss carryforwards, you can sell appreciated assets and use the carryforward to offset the gain. You can then buy back the investment and have a stepped-up basis. If you are harvesting losses, wait 30 days before you buy the investment back or you’ll fall under wash sale rules.
Mutual Funds: Be wary of buying mutual funds in your taxable portfolio at the end of the year. If the fund pays a dividend in 2021, you’ll have to pay tax on it and the fund’s share price will decrease by the amount of the dividend. Not fun!
Bonuses: If you are fortunate enough to receive a year-end bonus, consider contributing it to your 401(k) or another retirement plan if you haven’t maxed out your contributions. You’ll save on taxes this year and your funds will grow tax-free until you distribute them.
Disclaimer: There are a ton of details and nuances to all this stuff, so please do not consider this column legal or tax advice. Talk to a qualified tax advisor to find out which of these planning opportunities make sense for you and your family.
As always, you can reach me at (229) 244-1559 if I can help in any way.
Curt Fowler is president of Fowler & Company and director at Fowler, Holley, Rambo & Stalvey. He is dedicated to helping leaders build great organizations and better lives for themselves and the people they lead.
Curt is a syndicated business writer, keynote speaker and business advisor. He has an MBA in strategy and entrepreneurship from the Kellogg School, is a CPA and a pretty good guy as defined by his wife and children.
