Year-End Tax Planning Ideas for Individuals & Considerations for the Year Ahead

By: Nicole Strbich, CFP®, CPWA®, EA - Director of Financial Planning

Typically, year-end tax planning consists of accelerating deductions, delaying income, and maximizing contributions to tax-deferred accounts. While these ideas still may be beneficial for many people, the tax increases included in proposed legislation may cause some taxpayers to go a different direction this year.  

Considerations for Taxpayers with Income over $400,000 

On September 13, 2021, the House Ways and Means Committee released proposed legislation that included a number of tax changes. Many of these changes were tax increases targeting taxpayers with Adjusted Gross Income (AGI) in excess of $400,000 (or $450,000 for married taxpayers filing jointly). Even though the final bill when passed will look different than the current proposal, it is likely that many of these tax increases could be included. If your income puts you in this category for 2021, you may want to consider increasing your taxable income this year and delaying deductions until 2022. 

Some of the ways to do this include:

• Recognize long-term capital gains this year, instead of waiting to sell at an undetermined date in the future. The proposed bill does start the increased tax rate for sales as of 9/14/21, but this may or may not be included in the final version.
• Business owners may be able to accelerate income into 2021 by moving up closing dates of sales or delaying expenses or purchases until 2022.
• If you expect to need additional funds from your IRA or other taxable account next year, consider taking the distribution this year and holding on to the funds for use next year. 

Considerations for Taxpayers with Income under $400,000 Who Expect Higher or Similar Income in Retirement

For taxpayers who may not have a direct impact from these proposals, but who expect their income to increase or to remain at the same level through retirement, it still may be beneficial to avoid deferring taxes on too much of your income. It is important to have funds in both after-tax and pre-tax accounts as part of your overall investment plan. By diversifying the taxation of your resources in this manner, you provide yourself with the flexibility to plan around tax brackets and to reduce the impact of potential future tax increases. 

Some ideas to consider include:

• Contribute to Roth IRAs or Roth 401(k)s if possible (or utilizing the “backdoor” Roth IRA strategy), to accumulate tax-free resources in retirement. 
• Contribute to a Health Savings Account (HSA) if you are eligible. Save and invest the balance you do not use for qualified health care expenses. These contributions are tax-deductible, the funds can always be used tax-free for medical expenses, and HSA funds are accessible during retirement (they are taxed like traditional IRA distributions) for non-medical expenses.
• Look for opportunities to optimize deductions, potentially by bunching charitable contributions or other tax payments so that you can itemize your deductions one year and then take the standard deduction the next. This works well for taxpayers who don’t currently itemize but are close to the level where they can.  
• In 2021, all taxpayers using the standard deduction will be allowed to reduce their income for up to $300 of cash contributions to charity ($600 if married), so even if you expect to take the standard deduction keep receipts for contributions this year. 

Considerations for Taxpayers with Higher than Normal Income Who Expect a Decrease of Taxable Income in Retirement

For taxpayers with income that is higher than normal or for those who will have much lower taxable income in retirement, it is still beneficial to implement strategies to reduce taxable income this year. To do this, consider delaying gains or income into next year and accelerate deductions when possible. 

Additional ideas for this include:

• Maximize contributions to tax-deferred accounts like 401(k)s, 403(b), or 457s. If you previously contributed to the Roth portion of your 401(k), consider switching it to the traditional plan at the beginning of a year if you expect extra income, or right before a large bonus is paid.  
• If you normally make cash contributions to a charity throughout the year, consider contributing appreciated stock to the charity instead. This allows you to avoid realizing the capital gain on your tax return and still get a tax deduction for the contribution.
• If you are older than 70.5, consider making your charitable contribution directly from your IRA instead of cash from your bank account. This strategy, called a Qualified Charitable Distribution (QCD), allows you to distribute funds from your IRA and not have the distribution be taxable income to you. This works well for all qualified taxpayers who take the standard deduction or have a Required Minimum Distribution, as the QCD counts toward that requirement. 

Please contact us with any questions or to discuss your specific situation and planning opportunities. Make sure you are signed up for Buckingham Advisors’ newsletters to receive future updates about tax legislation and other financial planning, tax, and investment considerations.