Fourth Quarter Tax Planning Tips
November 16, 2021
With the pending Build Back Better bill changing daily, no one is sure what tax changes may be coming down the pipe. So take steps today to assure you have done your best tax planning with today’s laws.
1. Max Out Your Retirement Contributions
In 2021 you can contribute $19,500 (or $26,000 if you are age 50 or older) to your company sponsored retirement plan. It may also be good timing to confirm with your plan administrator if you have the option to make Roth 401(k) contributions. While there is no up-front tax deduction when contributing to the Roth 401(k), there’s the long-term benefit of tax-free growth and not having to take taxable required minimum distributions when you turn 72. You may consider splitting your contributions 50/50 between Roth and traditional for the first year.
All contributions to a 401(k)/403(b) must be made by December 31st.
IRA’s /Roth IRAs
You can also contribute $6,000, ($7,000 if you are 50 or older) to an IRA. You have until April 15, 2022, to make your 2021 IRA contribution. Remember that there is an income limit for eligibility to fund a Roth IRA, so check with your tax professional if you qualify.
2. Take Advantage of Tax Loss Harvesting
Higher capital gains rates may yet be a part of new tax changes in 2022 and high earners may want to accelerate taking gains this year while tax rates are low. Still, studies show your long-term returns will be higher if you also regularly book any losses you can to offset those taxable gains. You can recognize current stock losses with a temporary sale, and in 31 days you can repurchase the same security.
3. Use Your Federal Spending Accounts (FSA)
FSA’s are arranged through your employer and they let you use pre-tax dollars to pay for out of pocket medical expenses. Expenses may include copayments, qualified prescription drugs, insulin, and approved medical devices.
Each year, you decide how much you want to contribute to the account, and it is important to estimate your expenses accurately. If money is left over in the account at 12/31, some plans allow you to carry balances over, but with other plans, you forfeit your remaining deposits. Confirm the details of your plan with your employer.
Some employers offer an HSA (Health Savings Account) if you are part of a high deductible plan. You may be able to contribute $3,600 for an individual or $7,200 for a family pre-tax in 2021. With an HSA you are not required to spend down the balance like you must with a FSA. In some cases, you may continue growing the account by investing a specified portion in qualified funds. Your HSA can act as another retirement account and withdrawals for medical expenses are tax free.
Take advantage of contributing to your FSA or HSA if it is offered by your employer, but do not forget to use your FSA before you lose it at year end.
4. Know Your Tax Bracket
With tax brackets potentially changing again, if you are teetering between two consider managing capital gains and losses, deferring income, or accelerating deductions.
Some tax brackets for 2021:
Taxable income under $164,000 ($329,000 MFJ) will be taxed at 24%.
Taxable income under $209,000 ($418,000 MFJ) will be taxed at 32% and anything over will be taxed at 35% or 37%.
Long-term capital gain are taxed depending on income at 0%, 15%, and 20% if your taxable income is above $445,000 ($501,000 MFJ).
If your MAGI (Modified Adjusted Gross Income) is greater than $200,000 ($250,000 MFJ) you may also be subject to the additional 3.8% Net Investment Income Tax on your capital gains for the year.
5. Support Your Favorite Charities
Many tend to think about giving to charity during the holiday season. Some may choose to write a check or give cash, but there are other options that could be even more beneficial to you and your favorite charity.
- If you’re not able to itemize due to the increase standard deduction, you may consider “bunching” your charitable contributions into a single year.
- If you prefer not to make one large gift this year, you may think about setting up a donor advised fund (DAF). A DAF allows you to make a charitable contribution this year and you can make grants to charity in the future when you are ready to do so.
- If you have securities with large long term capital gains, you can gift these to charity, receiving a tax deduction for the full market value of the investment and avoiding ever paying taxes on the capital gain.
- If you must take required minimum distributions (RMD) from an IRA, you might consider a qualified charitable distribution (QCD). With a QCD you can send up to $100,000 directly from your IRA to a public charity. The distribution qualifies as part or all of RMD for the year, and it is not reported as income or as a deduction on your tax return. Your favorite charity benefits from your gifting and you save on taxes. Be sure to keep a record of these gifts as the brokerage with your IRA does not report QCDs.
Perhaps your holiday planning list already feels full, but you still have plenty of time to take advantage of some of these tax strategies. Find a few hours to review your current situation and see which of these savings opportunities will help add another smile to your holiday season. Remember, always to discuss any strategies with your accountant.
Susie McLane, Vice President