I was really hoping 2021 would be a much quieter year. It didn’t work out as I expected!
COVID has made a comeback (or two) and we’re likely going to undergo some major tax law changes soon.
But there are still plenty of year-end tax planning steps you can take, regardless of the outcome of the current legislation. Here are some tips to consider.
Manage your adjusted gross income
Your Adjusted Gross Income, or AGI, is the government’s benchmark for determining whether individuals are making “too much” money and should not receive tax breaks.
You will find your AGI on the first page of your tax return. Deferring income until 2022, increasing contributions to deductible pension plans and health savings accounts, harvesting tax losses and eligible education expenses (using the deduction for tuition fees and fees) can all reduce your AGI.
Know the AGI limits on the tax breaks you want to claim and manage your AGI accordingly.
Stimulus payments: As part of legislation 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 on the basis of the AGI of your previous year’s income tax returns. The 2021 checks were $ 1,400 for each taxpayer and $ 1,400 for each eligible dependent. For example, a couple who files a married case with a dependent child will receive a payment of $ 4,200.
These payments are subject to the limitations of the AGI. Payments are phased out for married spousal 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 are eligible for payments that you have not received, you can claim the payments on your 2021 tax return.
Charitable deductions: The standard 2021 deduction for married taxpayers is $ 25,100, $ 12,950 for singles. The limit on state, local, and real estate taxes that you can take as itemized deductions is $ 10,000. This limit could be increased under current legislation, so work with your advisor to plan accordingly. Both of these facts mean that a much smaller percentage of the population will itemize their taxes each year.
If you are a charitable donor, aggregating your charitable contributions may allow you to itemize years of high giving and take the standard deduction for years of lower giving.
You can consolidate charitable contributions by donating to your charities every two years or every few years. You can also use a fund advised by donors. A DAF allows you to make your contribution in one year (and take the deduction that year) while deferring the timing of donations to the charity.
To count on your 2021 taxes, checks to the charity of your choice must be mailed before the end of the year. Contributions paid by credit card can be withdrawn in the year you contribute. It doesn’t matter when you pay the credit card bill.
If you can, donate your valued possessions to charity. In most cases, you can deduct the full value, and neither you nor the charity pay taxes on the capital gain.
Do not donate property that has lost value in value since you acquired it. This will waste the capital loss. It is better to sell the asset, claim the capital loss, and then donate the proceeds.
The minimum distributions required from retirement accounts were optional in 2020. RMDs were required the year you turned 70 and a half. The SECURE law changed that. Now, if your 70th birthday is July 1, 2019 or later, you don’t have to take your first RMD until the year you turn 72.
Consider making your charitable contributions from your IRA by making a qualified charitable distribution. A QCD pays the money to the charity of your choice, excludes the distribution of taxable income, and helps you meet your minimum required distributions. You can start using a QCD the year you reach 70 1/2.
For 2021, non-determinants can deduct $ 300 in cash contributions. The deduction limit is $ 600 for married couples who file jointly. A change from 2020 is that this deduction no longer reduces the AGI.
Historically, the deduction allowed for charitable cash contributions was limited to 60% of the AGI. This limit has been removed for 2020 and 2021.
Medical Expenses: If you itemize and your medical expenses are above or near the 7.5% AGI threshold, consider obtaining and paying the necessary medical expenses before the end of the year.
Mortgage Interest: If you itemize, you can deduct mortgage interest on qualifying mortgages up to $ 750,000 if you incurred debt after December 15, 2017. Interest paid on second home mortgages can be deducted up to the combined limit of $ 750,000.
You can even prepay your January mortgage payment in December to increase your deductible interest.
Interest on home equity lines of credit remains deductible only if the loan proceeds are used to “buy, build or significantly improve” the home that secures the loan. Plan accordingly to maximize this deduction.
Tax Arbitrage: A very cool term for taking advantage of lower tax rates by deferring or earning income when tax rates are lower. Traditional methods of tax arbitrage include deferring tax realization by deferring collection of income through retirement savings and deferring distributions from social security and pension plans. You would only make these deferrals if you believed your income would be taxed at lower rates in the future, such as when you retire.
How will the proposed tax changes affect the tax rate you pay in the future? Take this into account when determining whether you need to make more income now or carry it forward.
Retirement planning; The temporarily lower rates created by the tax reform also have an impact on your retirement planning decisions. Based on your situation, is it better to invest in a Roth IRA and pay taxes now rather than defer taxes using a traditional IRA? Should you consider converting a Traditional IRA to a Roth and paying taxes on that conversion when the rates are temporarily low?
Child Tax Credit: For 2021, the maximum child tax credit is $ 3,600 per child 5 years of age or under and $ 3,000 per child 6 to 17 years old. The credit is refundable, so you don’t have to pay tax to take advantage of the credit.
Maximum credits disappear quickly. The phase-out of the maximum credit for married filing spouse taxpayers starts at $ 150,000 from AGI and is capped at $ 182,000. Then, taxpayers can receive the lower credit of $ 2,000 if their AGI is between $ 182,000 and $ 400,000. For singles, phase-out starts at $ 112,500 AGI.
If you have received down payments on your credit, these amounts will be deducted from the credit that 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 each child for whom you plan to apply for the credit.
529 University Savings Plans: The 529 plans have been a great way to prepare for college expenses while saving on state taxes. Distributions from 529 plans can also cover up to $ 10,000 in education costs for designated beneficiaries in public, private or religious elementary or secondary schools.
Georgia allows a tax deduction of $ 8,000 per beneficiary for joint filers and $ 4,000 for all other filers. 529 plans are a great opportunity to lower your taxes in Georgia while making a lasting difference in the lives of others. In Georgia, you have until April 14, 2022 to make 529 contributions to the plan that will be deductible from your 2021 taxes.
Tax loss or harvest of gains: If you have investments with losses that you would like to sell, you can do so before the end of the year and take those losses against that 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 benefit from an increased base. If you reap losses, wait 30 days before redeeming the investment or you will fall under the rules of blank selling.
Mutual Funds: Beware of buying mutual funds in your taxable portfolio at the end of the year. If the fund pays a dividend in 2021, you will have to pay tax on it and the share price of the fund will decrease by the amount of the dividend. Not funny!
Bonus: If you’re lucky enough to receive a year-end bonus, consider paying it into your 401 (k) plan or other retirement plan if you haven’t maximized your contributions. You’ll save on taxes this year and your funds will grow tax-free until you distribute them.
Disclaimer: There is a ton of detail and nuance to all of this, so please don’t take this column as legal or tax advice. Speak with a qualified tax advisor to find out which of these planning opportunities is relevant to you and your family.
As always, you can reach me at (229) 244-1559 if I can help you in any way.
Curt Fowler is President of Fowler & Company and Director of 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 business writer, keynote speaker, and business advisor. He holds an MBA in Strategy and Entrepreneurship from Kellogg School, is a CPA, and a pretty good guy as defined by his wife and kids.