As we get ready to jump into 2022, it’s a good time go over some tax planning tips you can still take advantage of for 2021.
You have until December 31, 2021 to max out your employer-based retirement plan contributions, and until April 18, 2022 for your IRAs. For the 2021 tax year, the maximum contribution you can make to employer accounts like your 401(k), 403(b), or 457 (elective deferral accounts) is $19,500, and the maximum contribution for your IRAs (traditional, Roth, or a combination) is $6,000. If you’re 50 or older, you can make catch-up contributions of up to $6,500 for elective deferral accounts, and $1,000 for your IRAs, as long as you’re still working. Maximizing annual contributions to your retirement accounts is a key ingredient to a successful retirement plan because it sets aside and invests tax-advantaged assets, and allows them to grow over a long period of time.
Your 2021 IRA contributions may also be tax-deductible. If you don’t have a retirement plan at work like a 401(k), and you contribute to a traditional IRA, you can deduct the full amount of your contributions, no matter how much you earn.
If you have stocks or cryptocurrency that have lost value over the course of the year, you can sell them and deduct up to $3,000 in losses to offset capital gains from other assets. Just keep in mind that for stocks, you need to steer clear of the wash sale rule, which prohibits buying the same stock back again within 30 days of selling. This rule does not yet apply to cryptocurrency, so if you’ve lost on crypto, you might want to take advantage of this deduction before new regulations are put in place.
There is no IRS prohibition for selling and buying back winners. So, in some cases, selling stocks that have gone up and paying the capital gains taxes now can be a good strategy, too. And if you’re in a low federal tax bracket, you may not need to pay any capital gains tax at all. Even if you’re in a higher tax bracket, this strategy can still be a good long-term tax move. The sale will reset the cost basis, which can reduce capital gains taxes in the future. In addition to the potential tax benefits, selling can benefit your overall portfolio health by compelling you to rebalance.
RMDs are annual withdrawals from pre-tax retirement accounts, like an IRA, 401(k), and 403(b), that you must take every year once you turn 72. RMDs are not paid out automatically, so you’ll need to calculate your RMD for each retirement account, and make the withdrawal before 12/31/2021, because any amount not taken will be taxed at a whopping 50% (you can access the IRS RMD calculation guide here). The tables and minimums are set to change on January 1, 2022, which serves as a reminder to make sure you use the current IRS table each year.
RMDs are taxed as ordinary income, so if you have a large pre-tax retirement account, your RMD, plus your Social Security income, and any other taxable income you earn, may push you into a higher marginal tax bracket. It’s also worth noting that RMDs were suspended for 2020 in response to the pandemic. Because RMDs are based on year-end account values, skipping an RMD last year may have left you with a sizeable RMD this year, especially given the returns most of us experienced since the markets cratered in March 2020.
Gifting is a tax planning strategy that can make sense in a number of different scenarios. For parents or grandparents who wish to transfer wealth to their children, grandchildren, distant relatives, or even friends, you can transfer up to $15,000 tax-free to anyone you like, every year. This money can be added to 529s, where it will be able to grow tax-free, or used for anything else you or the beneficiary desires. And if each spouse makes the same gift to the same beneficiary, you can give them up to $30,000. In 2022, the annual gift tax exclusion is set to increase to $16,000.
For those with estates nearing the estate tax exemption amount of $11.7M for individuals, and $24.4M for married and filing jointly couples, making gifts to multiple beneficiaries, or bunching one-time 529 gifts of up to $75,000 per beneficiary is another option to consider. Gifting is a powerful wealth transfer tool that moves money out of your taxable estate and delivers it tax-free to each beneficiary you choose.
A smaller, but widely available tax deduction for 2021, is for cash donations to qualified charities. This deduction is available to anyone who made a qualified donation, even if you’re taking the standard deduction. A married couple is allowed to claim up to $600 for cash contributions made to qualifying charities on their 2021 tax return. This deduction was part of the CARES Act, and is set to expire on January 1, 2022.
Another tax planning idea is making a qualified charitable distribution (QCD) from your traditional IRA to a qualified charity. You can donate up to $100,000 directly from your IRA to a qualified charity each year, and the contribution will count towards your RMD. The donation will not be included in your adjusted gross income, which could help keep you in a lower marginal tax bracket, and potentially reduce or eliminate taxes on your Social Security benefits.
It’s always wise to look at your marginal tax rate and how that may change from one year to the next when timing your charitable giving. The higher your marginal rate, the more valuable the deduction. Keep in mind that for a gift to be included in the current tax year, it must be completed by December 31st (e.g., the check must clear by 12/31/21 for the gift to fall in the 2021 tax year).
If you have any questions about your financial situation, schedule a discovery meeting with one of our fiduciary advisers, at no cost or obligation.