Clever 2021 Year End Tax Planning Strategies

by | Dec 30, 2021 | Tax Planning

Clever 2021 Year End Tax Planning Strategies

by | Dec 30, 2021 | Tax Planning

tax planning strategies


And taxes.

They’re the only two things that are certain in life, and *I think* you know which one we’re going to talk about here. ???? ????

Just like every year until now, tax filing is going to happen for 2021, but if you act on certain things, you could reduce the amount you have to pay substantially.

Even if the payment deadline is pushed back as a part of the Build Back Better plan (which is still pending), there are a number of things we know will remain certain about filing taxes in 2022, which I’ll recap for you here with five 2021 year end tax planning strategies.

With this planning checklist, you can start getting ahead of your taxes to save money, make smarter donations, and maybe even make some smart investment moves, depending on your situation.

1) Add up the money you donated to charity.

Even if you take the standard deduction of $12,550 to $25,100 depending on your marriage and household status, you can claim a $300 (single) to $600 (married) deduction on your adjusted gross income (AGI) for money you donated to qualifying charities.

(If you don’t know what the standard deduction is, it’s essentially a set dollar amount the IRS lets you deduct if you have no other qualifying deductions or tax credits. This amount—the $12,500 to $25,100 I mentioned above—reduces the amount of income you have to pay taxes on, no questions asked.)

If, on the other hand, you DO have other deductions and tax credits you can report, you usually still report the money you donated as a deduction. You’ll have to work directly with a tax accountant to figure it out, but these are the general parameter for the 2021 calendar year is this:

  • You can now deduct up to 100% of your AGI for cash contributions to qualifying organizations.

To prepare for filing your taxes in 2022, collect your donation receipts and have them ready.

2) Deduct more & avoid capital gains tax on stock donations.

If you’d like to make more donations but don’t necessarily want to part with more cash, a donor-advised fund (which accepts stock equity donations) could be the way to go.

When you donate to a donor-advised fund, you can deduct the fair market value of the stocks you donated if you fall into the group of people who itemize your deductions. (So you’re not taking the standard deduction.)

When you donate the stocks instead of selling the stocks and donating the cash, you get to deduct the same donated amount, *BUT* you get to avoid paying the capital gains tax you’d otherwise have to pay if you sold the stocks… whether you ended up donating them or not.

3) Do a Roth conversion to avoid future taxation.

Warning: this tactic is *only* worthwhile if you’re experiencing a low-income year. (Like if you lost your job due to the Covid fall-out, took time off to be with your family, only worked part of the year or part-time, or something else.)

It also really only works if you’ve got the cash on-hand to cover the taxes of this move.

But… if you can swing it, it’s really worthwhile.

The idea is to convert your traditional IRA into a Roth IRA.

The benefit of contributing (or converting) to a Roth IRA is that you pay the taxes now so your future distributions aren’t subject to being taxed. (This is incredible, because by the time you start taking your distributions, that money will have grown A LOT, and you won’t have to pay taxes on the profits. )

If you think you meet these parameters for 2021, talk to your financial advisor to see if it would be a good fit.

4) Max out your contributions to tax-deferred benefits.

On the flip side of the above tip, you can reduce your tax bill by maxing out your contributions to the federal limits allowed. (Contributions made to these benefits are pre-tax, meaning you don’t have to pay taxes on that income this year. Instead, you’ll pay taxes on that money when you withdraw it from these different benefit funds.)

The IRS recently released these limits, and here’s what they are for 2022:

  • 401(k): $20,500
  • HSA (health savings account): $3,650 single, $7,300 family
  • FSA (flexible spending account): $2,850

5) Make sure you take your required minimum distributions. (And donate some of it if you want to reduce your tax bill.) 

If you’re at retirement age, you might know that the IRS waived required minimum distributions (RMDs) in 2020.

But for 2021, that’s not the case.

They did increase the age from 70.5 to 72, but if you’re that age, you must take out your RMD no later than December 31, 2021. (So if you haven’t, do it now! – But, if it’s your first year taking RMDs, you have until April 1, 2022, so it does give you a little breathing room to get some solid financial advice around the situation.)

Warning: if you don’t take your deduction by the deadline, you’ll face a 50% tax penalty. (Meaning the amount *not* withdrawn that was required to be withdrawn will be taxed at 50%. Yikes. ????)

HOWEVER, if you don’t need the money out of your RMD and you’re wanting to lower your tax bill, you ARE allowed to donate a portion of your RMD, up to $100,000, to charity. This is called a qualified charitable distribution, and lets you exclude the distribution from your taxable income. (In other words, you don’t get taxed on it, so it’s almost like you didn’t receive that income in the first place.)

You need to work with your retirement plan provider to help coordinate it, and a good financial advisor or tax planner can point you in the right direction with this.

2021 Year End Tax Planning: Take Action, Save Money

Taxes are never sexy.

That’s no secret.

What most people with employee benefits and stock equity don’t realize, though, is HOW these things can work to tactically reduce your tax bill each year, if you plan correctly.

It’s my hope that by providing you with this list of practical, actionable things you can do, that you’re able to reduce your tax bill and/or advance your financial plan towards wealth in some significant way.

I’m always here to help, so don’t hesitate to book a call with me or someone in our office to talk a little more in-depth about how we can help you plan your taxes, save money on your tax payment every year, and grow your wealth in our On Your Way to Wealth program.

Chelsea’s background includes stock option compensation ranging from mergers & acquisitions, Restricted Stock Options, Incentive Stock Options, Employee Stock Purchase Plans and Non-Qualified Stock Options. In addition, she is familiar with IPOs for many companies and can help clients to plan for these large tax events.  Her advanced knowledge of these topics help clients with their tax preparation and planning. Working hand and hand with the financial advisors to mitigate tax risks and burdens, makes her unique to our firm.


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