The wealth management team at Schultz Financial Group conducts annual year-end tax planning throughout the fourth quarter. Planning was particularly challenging this year due to the uncertainty surrounding pending legislation. On December 16th, it was announced that the Build Back Better bill would be debated further in January but there would be no changes in tax law in 2021.
The time-tested year-end approach of deferring income and accelerating deductions to minimize the annual tax liability will continue to produce the best results for most taxpayers this year. Bunching itemized deductions, such as charitable donations, is another strategy that will help most taxpayers.
Below are a few year-end tax planning strategies to consider. Before implementing any year-end tax planning strategy, we recommend you discuss your specific situation with your tax advisor.
Year-End Tax Planning Strategies for 2021
1. Long-term Capital Gains
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15%, or 20%, depending on the taxpayer’s taxable income. If you hold long-term capital assets that have appreciated in value, consider selling enough of them to recognize long-term capital gains that will utilize the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount ($80,800 for a married couple in 2021). For example, if $5,000 of long-term capital gains you took earlier this year qualifies for the 0% long-term capital gains rate, then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.
2. Postpone Income
Postpone income until 2022 and accelerate deductions into 2021 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of adjusted gross income (AGI). This includes deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income is also desirable for taxpayers who anticipate being in a lower tax bracket next year.
3. Roth Conversion
Consider converting a portion of your traditional IRA to a Roth IRA. The amount of the Roth conversion will be treated as taxable income for the current year but may be a desirable strategy for those that anticipate being in a higher tax bracket next year.
4. Bunching Deductions
Consider bunching your deductions. Many taxpayers no longer itemize their deductions due to the high standard deduction ($25,100 for joint filers and $12,550 for single filers). By bunching deductions into the current year, a taxpayer may be able to itemize their deductions and lower their overall tax liability. Charitable contributions and discretionary medical expenses are examples of deductions that may be easily bunched into a single tax year.
5. Make a Qualified Charitable Distribution (QCD)
If you are over age 70½, consider making a Qualified Charitable Distribution (QCD). A QCD is a cash donation from your IRA to a charity that will satisfy your Required Minimum Distribution, up to $100,000, and will not be taxable income to you.
6. Use the Annual Gift Tax Exclusion
Use the annual gift tax exclusion amount of $15,000. Unused annual gift tax exclusion amounts do not carry over into future years. Gifting up to the annual gift tax exclusion amount annually can be an effective way to transfer assets to other family members.
Current laws, potential changes, and – most importantly – the client’s best interest should all be considered before implementing any tax-planning strategy. At SFG, we emphasize that tax planning should be a coordinated effort between the client and the client’s wealth and tax advisors. Please feel free to contact us if you would like to further discuss any of the strategies mentioned above.
Editor’s Note: This article has been updated to address best practices for the 2021 tax year.
Alyssa Dalbey is a Wealth Manager with Schultz Financial Group Inc.
Schultz Financial Group Inc. (SFG) is a wealth management firm located in Reno, NV. Our approach to wealth management is different from many other wealth managers, financial advisors, and financial planners. Our team of fee-only fiduciaries strives to help our clients build their wealth across four capitals: Financial Matters, Physical Well-being, Psychological Space, and Intellectual Engagement. We provide family office and wealth management services to clients located in Nevada, California, and other states. If you’d like more information, please check out our website or reach out to us via our contact page.