2022 is nigh, and amidst planning for the holidays and gearing up for those New Year’s resolutions, there’s another subject that should be top of mind: taxes.
As we reach the end of the year, it’s important to make the right moves to minimize your tax burdens. A new year means a fresh start, and what better way to start the new year with Tax Planning help from the financial advisors at CKS Summit Group. Here are some year-end tax planning tips to help you save on next year’s tax bill.
The IRS taxes income on the year in which it is received. If you have a windfall of money coming your way, why pay taxes on it if you can postpone the taxes until next year? Doing so may enable you to claim larger deductions, credits, and other tax breaks that are phased out over varying levels of adjusted gross income (AGI).
Married couples with children who have an AGI around $150,000 may want to consider strategies to lower their AGI to take advantage of the expanded child tax credit, dependent care credit, and any missed recovery rebate credits (stimulus checks). Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
While employees can’t delay their salary or wages, it’s possible to defer income from an end-of-year bonus if the company allows.
For those who are self-employed or do contracting work such as freelancing, you could put some of your invoices on leeway to ensure you receive payment next year. No matter how you receive compensation, you may want to consider deferring income from capital gains until next year.
This strategy only makes sense for those who think they will fall into the same tax bracket or lower in 2021. You don’t want to postpone a bonus or capital gains if you think you’ll fall into a higher tax bracket next year.
One of the best investments you can make is with a tax-deferred retirement account. With compound interest, these accounts can grow significantly over time. Employers will oftentimes offer 401(k) plans which are a great deal especially if they provide an employer match. If your employer offers a match program, try and contribute the most you can to capitalize on the excess contributions up to the limit. Even if you can’t afford the entire amount, try to contribute as much as you can to maximize your contributions.
Taxpayers have until April 15th as the tax filing deadline to make IRA contributions for the year. However, the sooner you contribute, the sooner your money may begin to grow. This is all dependent on market conditions of course.
Here are the IRA limits for the year ahead:
- The IRA contribution limit is $6,000.
- The IRA catch-up contribution limit will remain $1,000 for those age 50 and older.
- 401(k) participants with incomes below $78,000 ($129,000 for couples) are additionally eligible to make traditional IRA contributions.
- The Roth IRA income limit is $144,000 for individuals and $214,000 for couples.
- The saver’s credit income limit is $34,000 for individuals and $68,000 for couples.
Consider these new IRA rules when making retirement savings decisions for 2022.
Did you know you can possibly turn your losses into a benefit to you? Tax-loss harvesting is a year-end exercise that investors can use to help manage investment gains and losses as part of a broader financial plan, but there are many moving parts. This strategy, in which certain investment assets are sold at a loss, is designed to reduce your realized capital gains during the year, thereby reducing your tax liability. You can also use tax-loss harvesting to offset up to $3,000 in non-investment income (e.g., wages, pension income, Social Security income, etc.).
Just be careful of the Wash Sale Rule that states a loss will not be permitted if the same (or substantially identical) security is purchased within 30 days before or after the transaction that resulted in the loss.
Flexible spending accounts, or FSAs, are benefits employers offer to employees to help pay for medical expenses. The advantage of these accounts is that FSA account holders can avoid income taxes and Social Security taxes on the contribution’s amount. However, the downside is that if you don’t use the money within the year of contribution, you lose it.
With the end of the year rapidly approaching, you may want to speak with your employer to see if they adopted the grace period, which allows the account holder to postpone distributions until March 2022. If they didn’t, you might need to schedule a last-minute appointment at the dentist or doctor.
But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2021 state and local tax payments to exceed $10,000.
Estate tax is once again becoming a hot button issue even with the lifetime exemption currently set at $11.7 million per person. The question is whether any gift given now that uses up the exemption will be grandfathered if there is a future change to the exemption amount.
The IRS has issued favorable regulations on this issue so no claw-back is expected. If you have not done so already and are comfortable surrendering control of assets to the next generation, it could be beneficial to take advantage of the lifetime exemption in 2021. The prevailing view is that the current lifetime exemption amount is as good as it gets and using it up before it’s gone might be your best bet regardless of proposed legislation. The lifetime exemption is set to be cut automatically in 2025 due to expiring provisions in the 2017 TCJA.
Contributing to a charity is a great way to get a deduction. You can increase the tax benefit by donating stock or other property instead of cash. Essentially, you can deduct the gift’s market value and evade capital gains taxes on the appreciation of the asset. Accelerating tax deductions may also aid you in lowering your tax bill this year.
In order to get the deduction you have to have a receipt to prove your contributions, no matter what the amount is. Other deductions you can accelerate include property tax bills for next year or hospital bills. For those who use the standard deduction, which in 2021 is $12,550 if you are single or $25,100 if you’re married and filing jointly, you might be missing out on valuable tax deductions.
Consider making 2021 charitable donations via qualified charitable distributions from your IRAs. When you reach age 70½, the amount of the contribution is neither included in your gross income nor deductible as an itemized deduction and the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings. Consult with your trusted CKS Summit Group financial advisor who can help you discover valuable deductions and decide whether you should itemize to avoid possible losses.
The CARES Act was designed to provide financial assistance to businesses and individuals that are likely to be adversely affected due to COVID-19. The Act, originally signed into law in March, 2020, has been extended through December 31, 2021. To summarize:
- Employer Payroll Tax Deferral. Employers and self-employed individuals can defer payment of the employer’s share (6.2%) of the Social Security payroll tax, but the deferred amount must be repaid in equal installments by December 31, 2021, and December 31, 2022. For this year-end, make sure that at least one-half of the deferred amount is repaid by December 31, 2021.
- RMD Rules Temporarily Waived. Don’t forget to take RMDs in 2021 because the waiver applied to the 2020 calendar year only.
- Above-the-Line Charitable Deduction. For 2021, taxpayers are entitled to an above-the-line deduction of up to $300 for cash contributions to churches and charitable organizations (and $600 for married taxpayers filing jointly), but only if they take the standard deduction. Normally, charitable deductions are only available to taxpayers that itemize, so this relief provision benefits those taxpayers that take the standard deduction.
- Increased Income Limitation on Charitable Contributions. The CARES Act increases the adjusted gross income (AGI) limit for cash contributions made in 2021; individual donors can now deduct cash charitable contributions in an amount up to 100% of their AGI (increased from 60%). For corporations, the limit increased from 10% to 25% of taxable income.
- Exclusion from Income of Employer Payments of Student Loans. For 2021, employers may contribute up to $5,250 toward an employee’s student loans and the payment will not be taxable to the employee. The cap applies to this new student-loan repayment benefit as well as other educational assistance.
A final key piece of the puzzle: Don’t wait until the last minute for year-end planning. With the year coming to a close, now is the time to focus on year-end tax planning.
At CKS Summit Group, we can help you build and implement your year-end investment portfolio reallocation strategy, assess your current holdings from a holistic planning perspective, and provide support every step of the way. Our team of experienced advisors are equipped with different strategies for each of our clients to get maximum results for your tax planning needs. Contact us today for more information!