Dear valued client,
As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation –– a continued global pandemic, several significant natural disasters, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.
We’re here to help you take a fresh look at the health of your tax and financial well-being. Please contact us at your earliest convenience to discuss your situation so we can develop a customized plan. In the meantime, here’s a look at some issues to consider as we approach year-end.
Key Tax Considerations from Recent Tax Legislation
Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below includes a summary of the highlights in recent tax law changes to help you plan, and also key year end planning considerations.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
- Amount has increased for certain taxpayers
- Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)
- May be partially received in monthly payments
- Is applicable to children age 17 and younger
- The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.
Required Minimum Distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). For those reaching age 72 in 2021, the distribution can be made up until April 1, 2022 – thereafter distributions must occur prior to year-end.
Taxpayers should carefully consider the consequences of taking their first RMD now or in the following year, as delaying it may cause 2 RMDs to occur in the following year. This might seem beneficial if 2021 were a higher income year but can have unintended consequences in the following year such as increasing tax brackets, increasing capital gains rates, increasing the amounts of social security that are taxable, phase outs of credits and deductions, and more.
Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs. Missing your RMD may cause a 50% penalty on the missed amount!
Taxpayers may wish to consider utilizing their RMD for charitable donation purposes.
Charitable Contribution Deductions and Philanthropic Planning; Give in 2021 or 2022? How to Donate?
The timing of your charitable contributions still can be important as you can take the greatest tax advantage of charitable donations by claiming donations in a high-income tax year. This means taxpayers should review their taxable income at the end of the year and project their 2022 income to determine if a contribution this year or next makes the most sense.
Taxpayers may wish to consider Donor Advised Funds (DAF) should 2021 be a high income and high tax bracket year. A DAF allows a taxpayer to make a charitable contribution, receive an immediate tax deduction this year and then recommend grants from the fund in future years.
With the current economic conditions and appreciation in broad markets, many taxpayers hold securities and assets which have materially increased. Taxpayers may wish to consider donating long-term (held for over one year) appreciated assets instead of cash, claim a deduction equal to the market value and avoid capital gains taxes on the appreciation. This deduction is capped at 30% of taxpayers Adjusted Gross Income – unused deductions can carry forward for up to 5 years.
Taxpayers may also wish to consider Qualified Charitable Donation/Distributions (QCD). A QCD is a direct transfer of up to $100,000 of funds from an IRA to a qualified charity and can count towards satisfying an RMD. While the contribution does not qualify as an itemized charitable deduction, taxpayers do not have to pick up the income either. This means taxpayers may recognize a benefit even when they do not itemize their deductions. Taxpayers must be 70 ½ years of age or older and are limited to recognizing a QCD in the amount that would otherwise be taxed as ordinary income.
Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers) for cash. Contributions to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area.
Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.
State Tax Obligations Related to Teleworking Arrangements
The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer. Taxpayers should work with their tax professionals to determine any state nexus, residency, and or domicile issues to avoid any surprises come April 15th.
Additional Tax and Retirement Planning Considerations
We recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future. We can help you determine whether you’re on target to reach your retirement goals.
Here are a few more tax and financial planning items to discuss with us:
- Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
- Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible.
- Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes.
- Consider Sec. 529 plans to help save for education; there can be income tax benefits to do so, and we can help you with any questions.
- Consider any updates needed to insurance policies or beneficiary designations.
- Consider harvesting any capital losses on investments.
- Discuss tax consequences of converting traditional IRAs to Roth IRAs. This is especially beneficial in years with low taxable income, or in increasing tax rate environments.
- Let’s review withholding and estimated tax payments and assess any liquidity needs.
Looming Potential Tax Legislation
With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. Accelerating/Decelerating Income and Deductions will need to be carefully considered. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your tax and financial plan.
Year-End Planning Equals Fewer Surprises
There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.
Whether it’s working toward retirement or getting answers to your tax and financial planning questions, we’re here for you. Please contact our office today at 301.986.0600 to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.
Please contact Joseph Wilson for more information via our online contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.