Year-end tax planning in 2021 will be an exercise in guesswork and defensive maneuvers for many taxpayers, as Congress – once again – is negotiating major tax legislation that, if enacted, will make major changes to the tax code less than two months from now.

Year-end planning methods used in prior years should be effective for the 2021 tax year, but whether they will continue to be effective in future years remains to be seen. Following are some strategies that can be acted upon before the end of this year, with commentary on how the proposed tax legislation will impact them in future years, if enacted.

Loss Harvesting

If you are facing an unusually high-income year or had large capital gains, this may be a good time to revisit your investment portfolio and offload stocks that can generate losses to offset these gains. However, if you are going to sell and repurchase the same stock, you need to be aware of the wash sale rules, which prevent you from deducting a loss if you repurchase a “substantially identical” investment within 30 days.

• Under current law, graduated rates apply to individuals’ long-term gains and qualified dividends. The rates are 0%, 15% and 20%, depending on the amount of taxable income. Under the proposal, the top 20% rate would be replaced with a 25% rate. Additionally, the breakpoint for the beginning of the new 25% bracket would be lowered to align with the income amount applicable for the new 39.6% ordinary income bracket.

Roth Conversion

Converting funds in a pre-tax individual retirement account or 401(k) to an after-tax Roth IRA provides investors with tax-free future growth, even though they must pay taxes now on the converted funds. If you had a low-income year in 2021, you may be better off paying some taxes on conversion now.

• The proposed legislation would prohibit the rollover of traditional IRAs, as well as amounts in 401(K), 403(b), and 457 (b) plans to Roth IRAs by high-income taxpayers, those who are subject to the proposed highest tax bracket of 39.6% income tax rate or 25% on long-term capital gains. This provision is applicable after 2031.

Year-end Charitable Giving

Higher thresholds for standard deductions make it difficult to itemize deductions and claim the write-off, but you can “bunch” multiple donations that you would ordinarily make over several years into one year to bypass the standard deduction of $12,550 (single filers) and $25,100 (married filing jointly) and claim itemized deductions in the year of the bunching. The AGI limit for cash contributions made to qualified charities has been increased to 100% through 2021. If you are age 70½ or older, you can also make a qualified charitable distribution (QCD) of up to $100,000 per year from a pretax IRA, which does not count as taxable income.

• Giving a QCD at 70½ or older will reduce future RMDs (required minimum distribution) by lowering your overall IRA balance.
• If you are required to make an RMD, the QCD must be made payable to a qualifying charity and the transfer must be made by December 31 to count against the year’s RMD.

Required Minimum Distributions

RMDs have resumed for the 2021 tax year and must be taken by December 31 unless the taxpayer turned age 72 during the year, which defers the start date to April 1.

• Under the proposed legislation, effective for tax years beginning after 2021, the highest ordinary income tax rate applicable to individual taxable income would be increased to 39.6% from 37% and at the lower threshold amount. If you think you are going to be in the higher tax bracket in 2022, deferring your 2021 RMD to the following year may not be a good idea.

Year-end tax planning must be done in time to make the necessary adjustments before December 31.

Copyright © 2022, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).