As we quickly approach the end of 2021, it’s time to wrap up some loose ends and set yourself up for the new year. One of those loose ends is your taxes. Even though taxes are far from festive, proactively planning can save you money, and that’s cause for celebration! Here are some year-end tax strategies that you may benefit from. The IRS allows investors to offset their capital gains with similar capital losses. If you happen to be holding a losing investment, now might be a good time to sell it so that you can use the loss to offset your capital gains for this year and therefore lower this year’s tax bill. Contributing to charity can lower your tax bill if you itemize your deductions. And it doesn’t have to be just money that you donate. Clean out your closet and kitchen cabinets and take a box over to your local 501(c)(3) thrift store. As long as they give you a receipt for the donation, you will be able to itemize and deduct whatever the fair market value is for the items. If you have appreciated stock, you can get an even greater benefit by donating it to charity. You get to deduct the fair market value of the stock as a charitable contribution and the charity is not liable for the capital gains. With the new, higher standard deduction created by the Tax Cuts and Jobs Act, many of those who are charitably inclined are considering donor-advised funds. Donor-advised funds work as charitable giving savings accounts where you get a deduction when you put the money into the fund, not when you distribute it to a charity. If your itemized deductions are close to the standard deduction, you can open a donor-advised fund and put a large sum of money into it in 2021. You get to take the tax deduction for this year but hand the money to charities over time. Then, in 2022, you may not have deductions for your charitable giving, but you can still take the standard deduction. (1) If you are 72 or older, then you are required to take minimum distributions from your retirement accounts (except Roth IRAs). In the year that you turn 72, you have until April 1 of the following year. After that, the money must come out of your account by December 31. Another way to lower your income, and therefore your tax bill, is by deferring that income until retirement. In 2021, you can contribute up to $19,500 to a 401(k) plan, which will remove that money from your current taxable income. If you are 50 or older, your yearly contribution limit goes up to $26,000. You can put up to $6,000 in any type of IRA; $7,000 if you are over age 50. If you have lower income than normal in 2021, then it might make sense to convert your traditional IRA to a Roth. In doing so, you would pay the income taxes on the money now, at your 2021 rates, so that you could take all withdrawals tax-free in retirement. Another benefit of having your money in a Roth account is that it is not subject to required minimum distributions as discussed above. Once your money is in a Roth IRA, you can leave it in there to grow as long as you’d like. Keep in mind that Biden’s Build Back Better tax plan, currently waiting for Senate approval, includes major changes for backdoor Roths and Roth conversions. By 2032, backdoor Roths will no longer be available. This applies to single filers making more than $400,000 and married couples making more than $450,000. It also prohibits any after-tax qualified retirement accounts (like 401(k)s) from being converted to a Roth IRA, regardless of income level, starting in 2022. (2) If you were planning to take advantage of the backdoor Roth strategy, now is the time to talk to your financial professional about whether this is the right strategy for you. (3,4) If you have access to a health savings account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses. Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2021, the contribution limit is $3,600 for an individual and $7,200 for a family, with a $1,000 catch-up bonus for those over 55. (5) If you have a college student, consider paying next term’s tuition before December 31. Any tuition you pay for the first four years of undergraduate study is eligible for the American Opportunity Tax Credit. This can save you up to $2,500 per student on your tax bill depending on your expenses and income. (6) If you are the one doing the studying, you may be eligible for the Lifelong Learning Credit. (7) If you’re still working on saving for your children’s college education, then you may benefit from putting some money into a 529 plan before the year’s end. This won’t help with your federal tax bill, but it might lower your state taxes. Many states allow deductions for contributions to the state’s 529 plan and some even allow them for contributions to other plans. (8,9) As you can see, there are a lot of prudent steps you can take in the last few weeks of the year, even as you celebrate the holidays. If you need help implementing any of these strategies or want to learn more about what we do for our clients, call 440-505-5751 or email jcohen@Wadvocate.com to schedule an appointment. Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence and freedom from worry. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. ___________ (1) While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds. (3) A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. (4) Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. (5) https://www.optumbank.com/why/news-updates/2021-hsa-limits.html (6) https://www.irs.gov/credits-deductions/individuals/aotc (7) https://www.irs.gov/credits-deductions/individuals/llc (9) Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Harvest Your Tax Losses
Give to Charities
Open a Donor-Advised Fund
Take Your Required Minimum Distribution
Max Out Your Retirement Account
Convert Your IRA
Take Advantage of Your HSA
Prepay Tuition
Contribute to a 529 Plan
Reach Out for Help!
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