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10 Year-End Tax Planning Moves

Year-end tax planning for 2021 can be complicated due to new tax provisions and upcoming tax changes part of the new Build Back Better Act. It’s a critical time to use tax planning strategies to help you take advantage of financial opportunities and minimize your taxes. Everyone’s situation is unique so consult with a tax accountant for specific recommendations. However, there are some general year-end tax moves that you can benefit from for the tax year 2021. Let’s take a look at what you can do by December 31st.

1. Maximize Retirement Contributions

Consider opening a retirement account if you don’t already have one. Allowable contributions to tax-deferred accounts reduce your taxable income. Additionally, over time making maximum contributions can make a significant difference in how much you have when you are ready to retire. Contribution limits depend on the type of retirement account. Many plans allow catch-up contributions for those over the age of 55.

  • Traditional and Roth IRAs annual contribution limit $6,000 ($1,000 catch-up contribution for over the age of 50)
  • SIMPLE IRA and SIMPL 401(k) annual contribution limit $13,500 ($3,000 catch-up contribution for over the age of 50)
  • 401(k), 403(b), 457(b), Roth 401(k) and Roth 403(b) annual contribution limit $19,500 ($6,500 catch-up contribution for over the age of 50)
  • SEP IRA annual contribution limit $58,000 (or 25% of salary whichever is less)

2. Take Required Minimum Distributions

Retirement plan participants are required to start taking minimum distributions every year beginning the calendar year after attaining age 72 (or 70 1/2 for one who reached that age before 2020). The IRS imposes a 50% tax penalty for not taking a Required Minimum Distribution (RMD) or withdrawing less than the required amount. The annual withdrawal must be taken out by December 31. The only exception to the deadline date is for those who are taking out their first RMD. They have until April 1 of the year after they turn 72 to take RMD. However, those who wait till April 1 then have two RMD withdrawals in that year, one for the prior year and another for the current year.

3. Open an Health Savings Account

Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and any amounts you withdraw are tax-free when used to pay medical bills. For amounts withdrawn at age 65 or later not used for medical bills, the HSA functions much like an IRA. To obtain an HSA, you must be enrolled in a high-deductible health plan. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1).

4. Offset Investment Gains

Tax-loss harvesting is a strategy used to offset taxes by selling investment assets, such as stocks, bonds, and mutual funds, at a loss. Losses are not just used to offset capital gains; they can also offset ordinary income. The IRS allows joint filers to claim up to $3,000 of capital losses against your other income ($1,500 for married filing separately filers). After applying capital losses against capital gains and ordinary income, any remaining losses can be carried forward to offset income in future years. In the event of a wash sale, the tax write-off will be disallowed. A wash sale occurs when a stock or a security is sold at a loss and then replaced with a substantially identical stock or security within 30 days before and 30 days after the sale.

5. Bunch Medical Expenses

Every year taxpayers who itemize are allowed to deduct medical and dental expenses that exceed 7.5% of their adjusted gross income. If your expenses do not exceed the threshold, you can’t take the itemized deduction. However, you can push expenses into the following year. By bunching them into one year rather than spreading them out over two years you can exceed the threshold and maximize your deduction.

6. Donate to Charity

Taxpayers who itemize deductions can deduct cash donations to public charities in amounts of up to 100 percent of adjusted gross income (AGI). Bunching charitable deductions every other year is also a good strategy to enable the taxpayer to get over the higher standard deduction threshold. Married individuals filing jointly who take the standard deduction may take an above-the-line deduction of up to $600 in cash for charitable contributions made to qualified charitable organizations (other taxpayers can deduct up to $300).

7. Prepay Tuition

In some cases prepaying 2022 tuition before January 1st, 2021 may help maximize your tax savings. Prepaid education expenses can be used to determine education credit for 2021. Qualified education expenses paid in the current tax year for an academic period that begins in the first 3 months of the next tax year can be used in figuring an education credit for the current tax year. For example, a $4,000 payment made in December 2021 for the Winter session that begins in January 2022 can be claimed on the 2021 tax return.

8. Contribute to 529 Plan

Families can contribute to their 529 plan before the end of the year to lower their state tax bill. Over 30 states allow deductions or credits for contributions to 529 plans. Although contributions are still subject to federal taxes, earnings grow tax-free, and withdrawals for qualified expenses are not taxed.

9. Review Your Business Set-up

It’s a good idea to periodically reevaluate your business structure because, as we all know, tax laws can change and that business entity you chose when you first started out may not be the best option years later. The best entity structure will be chosen based on your company’s goals and the opportunity to minimize taxation.

10. Invest in Business Equipment

Business owners can reduce their taxable income by purchasing equipment before the end of the year. Under Section 179, the IRS allows small businesses to deduct up to $1,050,000 worth of expenses for equipment and similar assets in a single tax year instead of having to depreciate it over several years. You can buy the equipment on the last day of the year and still deduct the entire cost. To claim this 179 deduction, the equipment must be used for the business over 50% of the time. SUVs, Pickups, and vans can also qualify for this tax break only when their gross vehicle weight is over 6,000 pounds.

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