Year-end Tax Planning: Guesswork and Defensive Maneuvers for 2021By Reshma Ghouri | Sara Rabi | November 17, 2021
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.
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.
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. You can get the process started by contacting your Marks Paneth advisor.
About Reshma Ghouri
Reshma Ghouri, CPA, is a Director in the High-Net-Worth Group at Marks Paneth LLP. She has nearly 20 years of experience in public accounting – specializing in income tax planning and consulting services for high-net-worth individuals, multi-state income tax, expatriate taxation and private foundations. She also has experience serving the real estate industry. Ms. Ghouri is a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public... READ MORE +
About Sara Rabi
Sara Rabi, CPA, TEP, is a Partner at Marks Paneth LLP. She specializes in individual and fiduciary tax preparation and advisory services. She has extensive experience working with estates and trusts. Ms. Rabi is a member of the Society of Trusts and Estates Practitioner (STEP), which is a leading worldwide professional body for practitioners in the fields of trusts, estates and related issues, and is a designated Trusts and Estates Practitioner (TEP). Ms. Rabi serves... READ MORE +