Don't Wait until December - 2021 Tax Planning

Why put off until December what you can do today? As we enter the final three months of 2021, it’s time to start considering planning strategies for the year that may help lower your tax bill. Review the list below to see if there are steps you can take now to reduce your 2021 tax bill.

• Maximize your 401(k) deferral

  Make sure you are on track so that your 401(k) contributions will be maxed out by year end. The 2021 contribution limit is $19,500, with an additional $6,500 catch-up contribution if you are 50 or older. If you turn 50 (like me) during 2021, make sure your payroll department is allowing for the additional contributions.

  Also consider whether contributions to a ROTH 401(k) would be more beneficial. This would cause your current contribution to be after-tax (resulting in higher, not lower) taxes. This strategy works well when you are younger and not taxed at the highest rates.

• Health Savings Account
  Make sure you are on track to maximize your HSA contributions by year end. The 2021 maximum contribution is $3,600 for individual plans and $7,200 for family plans. If you are 55 or older, you can contribute an additional $1,000 catch-up contribution. If possible, try not to spend the dollars saved in the HSA account, as this account can be used like another tax deferred retirement account and provide for future tax free withdrawals.

• Monitor your Non-Retirement Investment Portfolio

  Monitor the markets and harvest tax losses to offset capital gains if it makes sense considering your overall investment strategy. Alternatively, determine if it is appropriate to take gains given strong market performance to date and the possibility of higher capital gain rates in the future. If you are riding the crypto roller coaster and have crypto losses, you can sell and rebuy without worrying about the wash sale rules.

• Real Estate Sales

  The real estate market is white hot! This means many sellers will be realizing large gains on the sale of their homes. Remember, if you sell your home and it has been your primary residence for two of the last five years, single filers can exclude gains up to $250,000 and joint filers up to $500,000. Due to this, it is very important to keep detailed records to support your tax basis in the home. This would include purchase documents, detailed listing of capital improvements (and receipts) as well as all selling expenses.

• Monitor Business Income and Deductions

  While no one can predict the future, the consensus is that tax rates will be increasing next year (as of January 1, 2022). If we do see an increase in tax rates for 2022, consider accelerating income into 2021 and deferring deductions to 2022. We will be updating you as more detailed legislation is introduced in the coming weeks and months.

• Plan for Charitable Contributions
  In 2021, taxpayers who take the standard deduction are also able to deduct up to $300 of CASH charitable contributions ($600 for a joint return). And, similar to 2020, taxpayers can deduct cash charitable contributions in tax year 2021 up to 100% of their adjusted gross income. Taxpayers should also still consider bunching charitable gifts to get the benefit of itemizing in one year and taking the standard deduction in another and/or donating appreciated stock rather than cash.

• Energy Tax Credits

  Good news for those taxpayers who have been contemplating installing solar panels or geothermal heat pumps. In December 2020, Congress extended the tax credit for cost of installation of solar electric property as well as geothermal heat pumps, previously set to expire at the end of 2021. For certain energy efficient property placed in service from 2021-2022, taxpayers can take a 26% tax credit and for property placed in service from 2022-2024, taxpayers can take a 24% tax credit. The credit is set to expire at the end of 2024, unless Congress acts to extend the credit again.

  For those of you considering the purchase of an electric vehicle, hold off until 2022 and hope that the new bills in Congress include the planned expansion of the EV tax credit. The current $7,500 credit only applies to the first 200,000 EV cars that a automaker sells (so it does not apply to a Tesla or GM car). The expansion would make the base credit of $7,500 available to any fully EV car and add another $4,500 if it is assembled in the US with union labor. So hold off on putting that EV under the Christmas tree until we see if these credits become law.

• Practice Tax Planning Considerations
  The listing above focuses on individual planning strategies, but you also have business income on their individual filing as a result of practice ownership. The current and future business tax rules significantly complicate entrepreneurial tax situations and we recommend you discuss with your tax advisors (hopefully that is JNG Advisors).