2021 Year End Tax Moves...

 

With the approaching Thanksgiving holiday, that means the end of the year is quickly approaching and there is still time to consider making tax moves before December 31st. This post is intended to provide some items to consider doing before year-end for individual/personal taxpayers and is not an exhaustive list of considerations.

Individuals:

For individual taxpayers, there are some considerations before year-end, some of these are just for 2021 and some are items to consider each year.

Itemized Deductions:

Itemized deductions is when your various deductions like medical expenses, mortgage interest, property taxes, state and local taxes, charitable donation in total exceed the standard deduction.  Medical expenses that exceed 7.5% of Adjusted Gross Income are added to the itemized deductions for Federal purposes, in AZ that percentage is not applicable.

The standard deduction for 2021 is $12,550 for unmarried individuals, $25,100 for married filing joint, $18,800 for Head of Household filing status.

*Special to 2021* - charitable contributions generally require being able to itemize deductions, but for 2021, taxpayers may take cash contributions in addition to the standard deduction, up to $300 for single taxpayers/$600 for married taxpayers filing joint.  This was implemented as part of the CARES Act law passed in 2020.

Bunching deductions - if you are close to being able to itemize, you may consider accelerating deductions into the current year.  This works for charitable donations and medical expenses, but due to Tax Cuts and Jobs Act state and local taxes are capped at a maximum of $10,000 per year. 

Retirement for 2021: 

Contributions

For taxpayers that have earned income (wages or self-employment income), you can make contributions to an IRA. There are annual limits on the amount that can be contributed to the accounts (the lesser of earned income or $6,000, if the taxpayer is aged 50 or over then the total contribution is increased by $1,000 - still limited to earned income).

For employees that have the ability to contribute to retirement accounts (like 401(k) or other similar accounts), review your contribution level and if you are not reaching the max contribution level before year-end, then consider making additional contributions via paycheck deduction to lower taxable income for this year, or if taxable income is low consider contributing to Roth 401(k).  The decision of type of retirement contributions should be discussed with a tax/financial advisor and consider your specific situation.

Distributions

For taxpayers age 70.5 or over are eligible to make charitable contributions directly from their IRAs and not be taxed on the distribution.  This is known as a Qualified Charitable Distribution and can be helpful for those that want to donate to an organization but counting the IRA distribution will cause higher income while the donation is not advantageous for itemized deductions.

Taxpayers that reached age 72 during 2021 are required to take minimum distributions from their retirement accounts.  The calculation is based on age and balance in the accounts at 12/31 the preceding year, calculated for IRAs, 401(k)s, 403(b)s separately.  Failure to take the required amounts can result in a penalty up to 50% of that required amount.

Health Savings Account/Flexible Savings Account:

Taxpayers that have a qualifying high deductible health insurance may be eligible to contribute funds to a Health Savings Account (HSA).  The contribution to an HSA is like a retirement contribution, deducted on the tax return as a reduction to income.  There are annual limits for contributions that depend on the coverage being individual or family coverage. Distributions, if used to pay qualifying medical expenses, are required to be reported on the tax return but not counted as income.

Flexible savings accounts are elections that employees make to set aside funds pre-tax from their paycheck to pay for medical expenses or dependent care expenses.  The limit for Medical FSA this year was $2,750 and Dependent Care was revised under the American Rescue Plan Act to $10,500 for 2021.  The flexible savings accounts are "use it or lose it" accounts, you have to spend the funds within the plan year to be able to get reimbursement, remember to submit for your reimbursement before that expires.

Capital Gain Income

Recognition of capital gains occurs when you sell an asset at a price higher than it was purchased (general principal).  With tax proposals aimed at increasing capital gains rates, there may be reason to sell this year (2021) and if you like the asset, you can purchase it back and get a higher cost basis for the asset. 

Sale of primary residence may generate capital gains income, but the sale may be partially excluded from tax.  This video discusses a quick overview of that topic.

Click the image or view your video from Matt Gaylor here

If there are stocks or other investments sitting at a loss, consider selling those assets to recognize capital losses. Capital losses can be used to offset capital gains and any excess losses can offset ordinary income, up to $3,000 per year.  If stocks are sold at a loss, be aware of wash loss rules - these rules deny the loss being deductible if the same asset is purchased 30 days before or after the date of sale.  The wash sale loss rules do not apply to crypto assets in 2021, but proposed legislation will change that.

IMPORTANT: *The comments in this article are not blanket recommendations as there may be other factors to consider in each individual's situation. It is recommended that you seek counsel from trained tax professionals that consider your specific situation.*

Check back for additional comments as this blog post is updated.