End of the year Tax Planning Strategies


Click for a Free Consultation

Tax Planning Strategies

As we approach the last few weeks of 2021, there are still strategies that you can implement if you wish to reduce your 2021 taxes. 2021 has proven to be unpredictable as we continue to live in a pandemic world. I am sure for many families and people, every dollar counts, so being able to implement some of these tax reduction strategies will be very important.

First, let’s start with what we know for the 2021 tax year. As of right now, President Biden’s Build Back Better plan has yet to be finalized, but the current version includes several provisions that will impact taxes for both higher and lower-income Americans. The expanded Earned Income Tax Credit and the Child Tax Credit will continue for 2022. The limit for the state and local tax deduction will increase from $10,000 to $80,000. The plan also includes several proposals that impact high-income earners that have yet to be finalized.

Now, let’s dig into some strategies that are still not too late to try to implement prior to the end of the 2021 calendar year.

team in brandon
1.) Make Contributions to Tax Deductible Accounts

You want to make sure that you are contributing as close to the $19,500 tax-deductible limit as you can for the year. If you are over 50, you can contribute an additional $6,500. Even after the year is over, you have until April 15th to make contributions to traditional IRAs. You may also consider contributing money into a health savings account or a 529 plan to save for future education expenses, perhaps for your children. You can make tax free contributions for $3,600 for individuals and $7,200 for families in

2.) Charitable Giving

You can contribute up to $300 in charitable donations if you are not itemizing for individuals and $600 for married couples. If you are itemizing, 100% of your charitable contributions are deductible.

3.) Harvest Losses

You can sell losses on stocks or cryptocurrency and first net them against any capital gains and further up to $3,000 of ordinary income. For stocks, you will need to consider the wash sale rule, which will not allow you to buy the same stock within 30 days of selling it. However, cryptocurrency doesn’t have this rule yet, so you may want to be able to take advantage of it now before that changes.

4.) Roth Conversion

You may want to convert a traditional IRA to a Roth IRA. This is typically something that is considered if you expect your taxes to be higher in the future. Roth IRAs have contributions that come from money that has already been taxed, so they are not taxed when they are withdrawn in retirement. Roth IRAs also do not have required minimum distributions, whereas a traditional IRA does.

5.) Understanding Capital Gains

You want to make sure you understand capital gains tax before you sell any stocks or cryptocurrency. Short-term capital gains get taxed at your ordinary income tax rate, while long-term capital gains are taxed at the capital gains tax rate, which is typically around 15-20%. If you are in a low federal tax bracket, it may be more beneficial to sell a stock for a short-term gain rather than a long-term gain. You may even want to consider selling a stock prior to year-end and then re-buying after the 30-day waiting period if you feel the gains on the stock will be even higher in the future. This will reset the baseline price of the stock so that you will have a lower gain in the future.

6.) Make to sure remember about Required Minimum Distributions

If you are retired and aged 72 or older and have a 401(k) or traditional IRA, then you are required by law to take a required minimum distribution (RMD) from the account each year and pay income taxes. This requirement was suspended for 2020, but it is back in place for 2021. You need to make sure this is done before the end of the year. The amount of the RMD depends on the total amount in the retirement account. Failing to take an RMD can lead to paying a significant penalty.

These are just some of the strategies that you can implement, if applicable to you, prior to year-end to help you lower your total taxes for 2021. At Freshwater Tax & Financial Solutions, we have several strategies that we implement with our clients throughout the year to best lower their taxes. We recognize each client is unique with their situation and explore every avenue possible, so our clients take advantage of every deduction and credit available to them.