• Have you sold any investments this year from sales of assets held for over one year? If so, this will be taxed at 0%, 15%, or 20% under Long-Term Capital Gains tax rates depending on your taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,800 for a married couple). If, say, $10,000 of long-term capital gains you took earlier this year qualifies for the zero rate, then try not to sell assets yielding a capital loss before year-end because the first $10,000 of those losses will offset $10,000 of capital gain that is already tax-free. This is a good time to consult with your investment professional to “match-up” gains and losses. Your tax professional can run some tax projection scenarios to make sure you are in the clear.

 

  • Do you believe that you will experience a decrease in income in 2022? If so, you may want to consider postponing any income, like a year-end bonus, until next year to take advantage of a possible lower tax bracket. You may also want to accelerate certain tax deductions in 2021 that are phased out over varying levels of AGI.

 

  • Did you or any dependent experience an unusual amount of medical expenses in 2021? Please note – Medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, charitable contributions, plus mortgage interest deductions on a restricted amount of debt, may be deducted in 2021. Still, these deductions won’t save taxes unless they total more than your standard deduction ($25,100 for joint filers, $12,550 for singles/married filing separately, and $18,800 for Heads of Household). Items such as pre-paying mortgage payments due in January 2022, as well as state and local property tax, if the payment remains under the SALT cap of $10,000, may allow you to itemize. You may also accelerate medical procedures and contribute more to charity. If you do not itemize but use the standard deduction, you can deduct an additional $300 ($600 on a joint return) for cash charitable contributions.

 

  • Are you planning to itemize your tax deductions this year? Has your investment account been good to you in 2021, and do you plan to make some large gifts to charity? You may want to consider gifting the highly appreciated investment directly to your favorite charity. The reason is that you can deduct the full amount of the gift and not have to pay the capital gains taxes on the appreciated asset. If this is something you are considering, you will need to have your tax professional and your investment advisor work in concert with the charity to make certain everything is accounted for properly. Conversely, you may want to donate investments that have suffered a loss. If so, sell these first to book the tax-saving capital loss; you can then donate the cash proceeds to charity. This strategy has certain deduction limitations and caveats, so working with your tax professional will maximize investment losses without a negative surprise in April.

 

  • Why not consider using a credit card to pay deductible expenses before the end of 2021? This pre-payment strategy will increase your 2021 deductions even if you don’t pay your credit card bill until next year.

 

  • Are you considering making an Annual Exclusion gift this year? AE gifts are used by taxpayers to reduce the size of their taxable estate upon their death. The 2021 gift exclusion amount is $15,000 ($30,000 for a married couple) and may be made to an unlimited number of individuals without incurring a gift tax. You cannot carry over unused exclusions to another year. Please inform your recipients to cash their check by December 31st, otherwise the gift must be rolled into the next tax year.

 

  • Have you taken your Required Minimum Distributions (RMDs) in your retirement account(s) for 2021 yet? You may recall that the RMD requirement was waived in 2020 due to Covid, but not for 2021. Failure to take the RMD will result in a 50% tax penalty on the amount you should have withdrawn for the year.

 

  • Will you be age 70½ or older by the end of 2021 and unable to itemize your deductions? Consider making 2021 charitable donations via qualified charitable distributions directly from your traditional IRAs. The amount of the contribution is not included in your gross income and is not deductible on Schedule A. However, you are still entitled to claim the entire standard deduction. Please consult with your investment professional and your tax advisor for a clear understanding of the tax implications, as each case is different.

 

  • Have you become eligible for a Health Care Savings Account? You can make a full year’s worth of qualifying contributions in December to count for 2021.

 

  • Have you worked for more than one employer in 2021 and your total wages will exceed $200,000? If so, you will be personally responsible for the additional Medicare tax payment.

 

  • Do you have immediate or future plans to fund an education?

 

    • Funding a 529 college savings plan for a child or grandchild is a way to utilize your Annual Exclusion gift of $15,000 per person ($30,000 for a married couple). A 529 savings plan is a tax-advantaged investment plan that allows families to save for future college costs to a beneficiary. There are actually two types of 529 plans: College Savings plans and pre-paid tuition plans. Note, these plans can reduce your state income taxes, but not federal.

 

    • Paying for private school and college tuition directly does not count towards the Annual Exclusion (AE) gifting limitations of $15,000 per person per year. If you plan to utilize this estate tax reduction strategy, payments must be made directly to the school on behalf of the student.

 

    • The American opportunity tax credit (AOTC) is for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of up to $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The Lifelong Learning Credit (LLC) equals 20% of up to $10,000 of qualified education expenses. To claim the full credit for the AOC or the LLC, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).

 

Please note that it is always a good idea to consult with your tax preparer and possibly your investment professional so they can run various “what-if” scenarios to determine which strategy or combination will work best. Many people do not realize that for most CPA firms, December is their second busiest month due to year-end tax planning. To strategize ways to save on your business and personal taxes, call Killingsworth Spencer CPAs at 770-552-8286.