Year-End Planning Strategies

It’s that time of year again and we know what’s on your mind. No, not exercising off the extra five pounds from this year’s Thanksgiving feast. It’s time for year-end planning to set yourself up for success in 2022. As you have heard us say countless times before, so much in life is out of our control. That’s why it’s crucial to control what we can.

Careful year-end planning can help you save money and improve your overall financial situation. Here are several action steps for you to consider as the year comes to a close.

Tax Planning Issues

If you are in the upper range of a tax bracket it is a good idea to find ways to reduce your income to prevent yourself from jumping into a higher bracket for 2021. For a great link to see the Federal tax brackets click here. Some year-end moves you can make right now are increasing contributions to your 401(k) or work sponsored retirement plan. The contribution limit is currently $19,500 plus an additional “catch up” contribution amount of $6,500 if you are over the age of 50. There is still time to max out your contribution during the last month of 2021.

If you have a Health Savings Account, be sure to max it out for 2021 as well. The contribution limits are $3,600 plus an additional $1,000 if you are over the age of 55. If you are married, and both of you have an HSA, your family can contribute $7,200, plus an additional $2,000 if both of you are over 55. HSAs are one of my favorite investment vehicles because of the incredible tax treatment. Every dollar you contribute lowers your Adjusted Gross Income and thereby reduces your tax liability. So long as the money is withdrawn to pay for qualified medical costs, every dollar that comes out is completely tax free. It’s the only investment vehicle like it on the planet and that’s why I love it! For more details on what constitutes a qualified medical expense click here.

One of the other things I like about Health Savings Accounts is you can invest the cash proceeds. I recommend you keep several thousand in cash to cover any unexpected medical expenses and anything in excess of this amount should be invested and put to work. If you currently own an HSA but are not investing a portion of it, I encourage you to take action and get the excess cash invested and growing for you.

Are you charitably inclined and want to reduce taxes?

If you are charitably inclined and want to reduce taxes, consider making year-end donations to the charity or church of your preference. Everything you donate helps to reduce your Adjusted Gross Income which results in reducing your tax liability. Even if you are not itemizing any longer, you can still make a charitable contribution of $300 ($600 if you are married and filing jointly) thanks to federal coronavirus relief legislation. For more information and details click here.

Another option for you is to donate highly appreciated securities. The market has been on a good run since early 2020 and many of your investments may have large, embedded gains in them. By donating the highly appreciated securities you can do well by doing good; the donation reduces your AGI and it also unloads a future tax liability that you will encounter. Another way to reduce your tax liability at year end is to make a Qualified Charitable Distribution (QCD). You can take your Required Minimum Distribution and donate it directly to a charitable organization. This succeeds in lowering your AGI.

A key detail to know is that Qualified Charitable Distributions are capped at $100,000. Also, they must be made directly to the charity. In other words, don’t take the distribution and then write a check to the charity but have the RMD made payable to the charity of your choice. If you follow the rules you can succeed in lowering your tax liability. Click here for more information.

If you expect to take the standard deduction ($12,550 if single, $25,100 if married filing jointly), consider bunching your charitable contributions every few years which may allow itemization in specific years. Another excellent option is to contribution to a Donor Advised Fund (click here for more). You can take an immediate tax deduction when you make a charitable contribution to your DAF, reducing your tax liability. DAFs allow you to recommend grants to your favorite charities over time, so you can effectively pre-fund years of giving with assets from a single high-income event.

Here are several tax advantages you receive by contributing to a Donor Advised Fund:

  1. Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. Since a Donor Advised Fund is considered to be a public charity, contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI):
    1. Deduction for cash – up to 60 % of AGI.
    2. Deduction for securities and other appreciated assets – up to 30 % of AGI.
    3. There is a five-year carry-forward for unused deductions.
  2. Capital Gains Tax: You will incur no capital gains tax on gifts of appreciated assets (i.e. securities, real estate, other illiquid assets.)
  3. Estate Tax: Your DAF will not be subject to estate taxes.
  4. Tax-Free Growth: Your investments in a DAF can appreciate tax-free.
  5. Alternative Minimum Tax (AMT): If you are subject to alternative minimum tax (AMT), your contribution will reduce your AMT impact.

Other Tax Considerations

Donors can deduct the full market value of certain contributed assets, subject to the AGI limitations listed above. These assets include:

  • Closely held stock (C-Corp or S-Corp)
  • Real estate

Do you have any capital losses for this year or carryforwards from prior years?

If so, consider rebalancing your taxable account now. The market has been strong this year which means certain asset classes represent more of the portfolio than they should. Use the loss carry forward from last year to rebalance your account in a tax efficient manner. We have been coordinating with our clients CPAs for months to work through this process.  If you don’t need to rebalance your taxable account, you can also use $3,000 of the losses to reduce your Adjusted Gross Income for 2021.

Are you age 72 or older, or are you taking an RMD from an inherited IRA?

If so, consider the following: RMDs from multiple IRAs can generally be aggregated, RMDs from inherited IRAs can’t be aggregated with RMDs due on any other retirement account. Also, RMDs from employer retirement plans generally must be calculated and taken separately, with no aggregation allowed. However, 403(b) plans are an exception, and RMDs from multiple 403(b)s can be aggregated. Make sure to take your RMD by December 31st because failing to do so will result in a penalty equal to 50% of the missed RMD.

Has 2021 been a year of lower income for you?

If you find that your income is reduced in 2021, consider doing Roth conversions (click here). A Roth conversion is where you transfer or “convert” a portion of your Traditional IRA into your Roth IRA. The conversion is taxable but the money in the Roth gets to grow tax free so long as a couple basic requirements are met. If you find yourself in the 12% tax bracket this year this is the “sweet spot” in my opinion, where Roth conversions can be a beautiful thing.

Estate Planning Issues

Have there been any changes to your family, heirs, or have you bought/sold any assets this year?

If so, consider reviewing your estate plan. Click here to see the “What Issues Should I Consider When Reviewing My Estate Planning Documents?” checklist for more details.

Are there any gifts that still need to be made this year?

If so, gifts up to the annual exclusion amount of $15,000 (per year, per person) are gift tax-free. You can use your annual exclusion amount to contribute up to $15,000 per year to your grandchild’s 529 account, gift tax-free. Alternatively, you can make a lump sum contribution of up to $75,000 to a beneficiary’s 529 account and elect to treat it as if it were made evenly over a 5-year period, gift tax-free. Both of these strategies will successfully reduce your estate which can be valuable as we are preparing for the estate tax exemption to be reduced in the near future.

Insurance Planning Issues

Will you have a balance in your FSA before the end of the year?

If so, consider the following options your employer may offer:

Some companies allow up to $550 of unused FSA funds to be rolled over into the following year. Some companies offer a grace period up until March 15th to spend the unused FSA funds. Many companies offer you 90 days to submit receipts from the previous year. If you have a Dependent Care FSA, check the deadlines for unused funds as well.

Did you meet your health insurance plan’s annual deductible?

If so, consider incurring any additional medical expenses before the end of the year, after which point your annual deductible will reset.

In Conclusion

I encourage you to take this opportunity to implement some of the strategies we have laid out here. There are changes coming to the tax code and it’s important to use the current rules to your advantage. We will continue to monitor the proposed changes coming out of Washington and are here to help you navigate through them next year.

Enjoy the year-end festivities coming up and most importantly, enjoy some time with your family. If you have any questions about this or would like to explore it further, please do not hesitate to contact our office. We are happy to help you navigate year end planning strategies.