Taxes at Year-End

Well, the only constant is change…and that’s the theme once again as we near the close of another year…

2018 brought about the first major changes in taxes in decades. That apparently paved the way for significant changes every year since!

This message may be premature in that we don’t yet know the exact changes from the possible sweeping legislation on the horizon. But we also can’t be sure it will happen before year end, so we didn’t want to delay the items below.

While we don’t know exactly what lies ahead, there are some beneficial things you don’t want to miss before the year closes.

Retirement Plan Contributions
If your finances allow, max out those 401k’s, especially up to your employer match. Also consider Roth or Traditional IRA contributions. Just be sure you aren’t above income limits to do so. If you’re not sure about limits, you’re able to fund by next April’s filing deadline, so you can hold off until your draft tax return is prepared to you can see the impact of IRA moves. Click here for more info on these accounts. NOTE: 401k contribution limits will be increasing from current levels of $19,500 up to $20,500 for 2022. So be sure to adjust with your employer for next year.

Health Savings Accounts (HSA)
Be sure to max out those HSA contributions. HSA’s can be the best retirement plan out there. I know HSA’s are for medical, but if strategized correctly, they can be an awesome wealth vehicle. Click here to learn more about our strategy to ensure you’re taking advantage of the only triple tax benefit account out there!

Flex Spending Accounts (FSA)
Check your employer’s fund carryover policy and ensure you’re not exceeding the allowable balance (usually $500)…you don’t want to forfeit those funds!

Charitable Deduction Change
In 2020, taxpayers could deduct up to $300 in charitable deductions even if they didn’t itemize. For 2021, the provision has been modified to allow married couples to deduct up to $600 without itemizing. With that being said, we always recommend providing your tax preparer with all data, so you don’t miss any deductions, especially when it comes to itemizing versus taking the standard deduction. That’s because even if you don’t itemize with the IRS after the standard deduction increase, you may still be eligible for deductions like the charitable donation mentioned above or itemize on your state tax return since many states never conformed to many of the IRS tax reform changes. For married filers, the standard deduction is $25,100 for 2021 and is increasing to $25,900 for the 2022 tax year. For single filers the figures are halved.

Gifts to Individuals
If planning to gift more than $15,000 to any individual, be sure to give $15,000 prior to December 31 to avoid a gift tax return filing requirement. An additional $15,000 can then be given for the 2022 tax year on January 1, allowing for $30,000 to effectively be given to any individual in a two-day period. Married couples can double this amount since the $15,000 annual limit applies to each giving spouse. Here’s more on gifts.

Roth IRA Conversions
The current administration may be ending this strategy, so consider that conversion of Traditional IRA funds over to a Roth IRA now. Best to check with your financial advisor or accountant before making this move, as it can hit you with a big tax bill now if not planned properly.

Capital Gains Strategy
Capital gains tax rates may be changing soon, but likely only for those earning more than $1 million. In any event, a low-income year can be a good time to sell winning stocks. Capital gains with the IRS are taxed at 0%, 15%, or 20% (possibly even 33.8% for high income folks). Yes, you can achieve $0 IRS taxes on stock sales if your income is below thresholds! NOTE: many states tax capital gains at ordinary income rates. So, this generally only applies to IRS strategy. The taxable income threshold for joint filers to stay in this 0% IRS capital gains bracket is $80,800…and it’s $40,400 for individuals. That means a married couple with $60,000 taxable income (before sales of securities) could have gains of $20,800 and pay $0 tax to the IRS.

Bunching
If you’re on the cusp of either taking the standard deduction or itemizing deductions, consider “bunching” your charitable donations with a donor advised fund strategy (DAF). A DAF allows you to itemize a large donation in the current tax year without having to actually disburse the funds to the charity right away. This way you can choose your charity over the coming years and deploy as you wish. Then you’d just take the standard deduction in those subsequent years, after receiving the full benefit of your donation upfront in the itemizing year.

”Other Dependent” Credit
This credit is still in play for the 2021 tax year. Not only can you get credit for kids, but if you provide at least half the support for someone who’s not your qualifying child, you may be able to claim a $500 “other dependent” credit for this person. The year-end move here would be to ensure any possible “other dependents” don’t exceed the $4,200 gross income limit for the year, as that’s a requirement to take this credit.

Let us know if you have questions regarding your specific situation…we’re happy to help!