Your 2021 Year-End Planning Checklist

2021 has been another year of unknowns. Among those is what income tax and estate tax might look like after any new legislation is passed. As we are writing this article on September 14, 2021, the House Ways and Means Committee is preparing legislation to present to the House of Representatives for consideration. For a comparative view of various legislation options which have been discussed over the past few months, please see Jen Muckley’s article Tax Changes Looming?

While it is hard to plan when we don’t know the future, it’s been helpful to weigh various options with our clients throughout the year. While we reference the House Democrat Plan throughout this article, there are likely to be many changes before legislation is passed. Once legislation passes, we will update this checklist with any action items applicable to year-end planning. Rather than touch on all aspects of your financial planning you might revisit annually, this checklist will focus on income tax and health care planning items that are time-sensitive due to their December 31 or April 15 deadlines. As always, we suggest working with your CPA before making any significant changes to your strategy.

Gifts (Charitable and Individual)

• Required Minimum Distributions (RMDs) from IRAs are back in 2021! If you are over age 72, consider giving to charity directly from your IRA. This is called a Qualified Charitable Distribution or QCD and is a wonderful option, as it reduces your taxable income³ “above the line⁴.” Each IRA owner may contribute up to $100,000 directly to charity from their IRA each year. If you would like to make a distribution from your IRA at Bragg, please let us know as soon as possible. Our goal is to have distributions from IRAs completed before December. Reminder: Donor Advised Funds cannot be the recipient of a Qualified Charitable Distribution.

• If you are under age 72 or don’t have an IRA, consider “bunching” charitable contributions if you are itemizing your deductions or are close to being able to do so. With income tax rates likely increasing in 2022, consider if bunching is more beneficial to you in 2021 or 2022. If you have gifts remaining for 2021, consider whether it is best to send cash or appreciated stock to your charity.
• Charities should receive your gift by December 31, 2021, for it to be counted on your 2021 tax return. If you are planning to gift stock from your taxable account at Bragg, we recommend initiating this request by the first week in December to allow plenty of time for the transfer to be processed and received. Our custodians cannot guarantee that gifts of stock made after December 17 will arrive at the charity in 2021.
• The Consolidated Appropriations Act (CAA) extended the two following provisions from the CARES Act through the end of 2021:
  • Individuals who itemize their deductions may fully deduct cash charitable gifts up to 100% of their AGI¹ in 2021. This is up from 60% previously in 2019. Long-term Capital Gains assets used for contributions remain at 30% AGI limit. Read You Could Have $0 Taxable Income in 2021 for more.
  • If you didn’t itemize your deductions in 2020, each “tax unit” was allowed a $300 above-the-line charitable deduction in 2020. This was changed to a below-the-line⁵ deduction in 2021; it now allows single filers to deduct up to $300 and married filers up to $600 for cash contributions made directly to a 501c(3).
• The annual gift tax exclusion for gifts to individuals is $15,000 per person in 2021. This is a “use it or lose it” exclusion, so be sure to send gifts for receipt prior to December 31, 2021, if you intend to utilize this in 2021. Also, remember that assets gifted to individuals during your lifetime retain their original basis. Assets inherited at death receive a “step-up” in basis at death. (This could change with the passing of significant estate tax reform, but it is not part of the current House Democrat Proposal.) Consult your advisors to determine the best assets to give away during your lifetime.
• If you would like to make a gift to a 529 plan utilizing the 2021 annual gift tax exclusion amount, the gift must be deposited in enough time to be recorded on a 2021 statement.
• If you took a qualified distribution from a 529 plan this year, make sure the related qualified expenses are paid by December 31, 2021. For example, if you took a distribution from the 529 plan to pay for textbooks, make sure you purchase those textbooks by year-end.

Taxes

Consider your year-to-date realized capital gains in your taxable accounts. Are you close to the thresholds described below? Or has your CPA advised you to limit gains from your investment portfolio due to other income incurred this year? With anticipation of a higher capital gain tax rate in 2022 and beyond, some of our clients have decided to realize more gains in 2021 than in past years. Note the current draft of legislation proposes an increase in capital gain rates to 25% for married couples when income reaches $450,000 (and at $400,000 for individuals), retroactive to September 13, 2021.

• If your taxable income happens to fall under $80,800, filing jointly, or under $40,400, filing single, you might be able to take additional gains at a 0% rate.
• If your taxable income is above these limits, your long-term capital gains rate will be 15% until taxable income exceeds $501,600, filing jointly, or $445,850, filing single. With the House Democrat proposal, the capital gains rate could increase to 25% at income levels of $450,000 for married filers and $400,000 for single filers, effective September 13, 2021.

If you are a Bragg client, we have an Investment Policy Statement for you on file, where we discussed and decided upon an annual realized capital gain tolerance. If you have significant unrealized gains in your taxable (non-retirement account) portfolio, we often suggest an increase in this gain tolerance in order to maintain diversification and your target equity allocation. Our new standard for capital gain tolerance is 2% of the total asset balances. Your portfolio manager watches this amount and works to stay below it all year. Also see Benton Bragg’s article Higher Tax Bills Ahead!

Mutual funds often make capital gain distributions in the fourth quarter. If you would like to know where your portfolio stands and what to expect, please don’t hesitate to call us to discuss. And, if you are not a client of Bragg, we recommend that you ask your Investment Advisor if they have a target on file for you and share this with your CPA.

• Tax Loss Harvesting—If you sell assets for tax loss harvesting (to offset gains) but want to maintain exposure to that asset, be sure you wait more than 30 days before re-purchasing the asset to avoid the wash-sale rule.
• Did your CPA recommend that you pay quarterly estimated tax payments this year? If so, have you made them? If not, can additional withholding be taken from your paycheck or IRA distribution to allow for this oversight? This can help you prevent an underpayment penalty.
• Are you close to the MAGI²  threshold of $200,000 (single) or $250,000 (married/joint)? Keep in mind, this is where the additional 0.9% tax on earned income and 3.8% tax on net investment income starts. Consider deferring income recognition if possible.
• If you are self-employed or have income from a small business (including income-producing real estate), you may be eligible for a Qualified Business Income (QBI) deduction. Work closely with your CPA to determine if you might benefit.
• The current draft of House Democrat legislation proposes increasing the top marginal income tax rate to 39.6% (currently 37%) for those married/filing jointly with taxable income over $450,000 and those single filers with taxable income over $400,000.
  • With income tax rates likely to change on January 1, 2022, is there any ordinary income that would make sense to accelerate into 2021? (Note proposed capital gain increase could be retroactive to September 13, 2021, so we are only referring to ordinary income in this paragraph.)
  • Although not part of the current House Democrat Plan, some hope to see the SALT limitation removed. This is the current $10,000 cap on deductions from state and local income tax, which includes property taxes paid. Consider if this potential change would allow you to increase your itemized deductions in 2022 or beyond. You may want to wait to pay your 2021 real estate taxes and 4th quarter state estimated income tax payments until January to be included in your 2022 itemized deductions instead of 2021.

Retirement Plans

• IRA or Roth IRA contributions—Plan to make 2021 IRA contributions prior to April 15, 2022. Contribution limits are $6,000 per person (plus an additional $1,000 catch-up contribution if you are age 50 or older). See phase outs for eligibility.
• Remember, if your income level makes you ineligible to make direct Roth IRA contributions, you can still consider making “back door” contributions. Check with your advisor to determine what is best you.
• Employer 401(k) and Other Retirement plans—Check your year-to-date contributions. Are you on track to maximize your allowable deferral to these plans? Each employee can contribute $19,500 (plus an additional $6,500 catch-up contribution if you are age 50 or older) to an employer-sponsored elective deferral plan, like a 401(k). If you aren’t on track to maximize, can your cash flow allow for moving closer to this target over time? If you are already easily maximizing, there are ways to contribute additional funds on an after-tax basis. Note the strategy explained in Marc Scavo’s article Mega Backdoor Roth Contributions is on the chopping block in the current Democrat House Proposal, so 2021 may be the last chance to employ it.
• Consider a Roth conversion if you are in a lower bracket today than anticipated in future years. Read more about Roth IRAs.
• If you are over age 72, have you taken your IRA Required Minimum Distribution (RMD)? This applies to you if you have a traditional IRA. If your IRA is at Bragg, we have a process to reach out to you and make sure these distributions are completed by year-end. Collaborating with your CPA on the amount of tax to withhold is recommended, as they may base your quarterly estimated payments on the amount you withhold from this distribution.

Health Care Accounts and Benefits

• If you have a Flexible Spending Account (FSA) through your employer, are you on track to use the balance by the required date according to your plan? Remember: Any funds you don’t use, you will lose.
• If you have a high-deductible health plan (HDHP), are you contributing to a Health Savings Account (HSA)? Are you on track to maximize your savings this year? Unlike the FSA mentioned above, HSA balances don’t have to be spent down each year.
• Watch for your employer’s 2022 open enrollment for health care and other benefits, which often happens sometime in the fall. Be sure to review any changes and compare options to ensure you still have the right coverage for your circumstances.
• If you have healthcare through ACA (Affordable Care Act), have you considered whether the income you reported to ACA is in line with your actual income expected by year-end? If your income is substantially different (higher or lower) you can submit a form to the ACA to report this difference. Your premiums for the remainder of the year will be adjusted accordingly but it will reduce the amount of the benefit you are required to pay back when you file your tax return if your income is higher than initially reported.
• If you are on Medicare Part D, 2022 open enrollment dates are October 15 through December 7, 2021. Our partners at SHIIP (Seniors’ Health Insurance Information Project) have shown us how valuable it is to re-evaluate your prescription coverage. Check to make sure your prescriptions have not changed tiers and that the insurance company hasn’t changed pricing.
• The Medicare Part B premiums you will pay in 2023 will be based on your 2021 Modified Adjusted Gross Income, or MAGI. While we don’t have the 2022 rates yet, the following table shows the 2021 rates based on 2019 MAGI ranges. Are you close to an increase in premium level based on the ranges shown below? If so, consider whether delaying income to 2022 is a viable option.

As we mentioned, this is not meant to be an exhaustive list of all items to consider, but a list of the most common tax items (and a few health care items) that may be within your control. Please reach out to us at Bragg with any questions or if you would like to discuss further. We also advise that you work with your CPA to run tax projections before implementing any significant changes. If you would like a more comprehensive list of questions to consider regarding your overall financial health and planning, please see the article Financial Planning 101.

Definitions:

¹ Adjusted Gross Income (AGI) (line 11 on your 2020 Form 1040) is gross income less certain adjustments. AGI includes all taxable income, including wages, bonuses, self-employment income, taxable interest, dividends, capital gains, retirement distributions, annuities, rents and royalties, taxable social security income, alimony received (with agreement prior to 2019), etc.  The most common adjustments that reduce your AGI include one half of self-employment tax paid, alimony paid (with agreements prior to 2019), pre-tax retirement/HSA plan contributions, student loan interest, and certain losses. Back to top

² Modified Adjusted Gross Income (MAGI) then adds back to your AGI certain deductions from above. Back to top

³ Taxable Income (line 15 on your 2020 Form 1040) is AGI less Deductions (Standard or Itemized). Back to top

⁴ Above-the-Line Deduction: If a deduction is “above the line,” it is subtracted from gross income in order to calculate Adjusted Gross Income. Examples of these deductions are alimony paid, retirement plan contributions, health savings account deductions, etc. These deductions can be taken in addition to the standard or itemized deduction. Back to top

⁵ Below-the-Line Deduction: If a deduction is “below the line,” it will reduce your taxable income, which is the number that determines the amount of tax you will pay. Back to top

^{4 & 5} While both above-the-line and below-the-line deductions ultimately reduce your taxable income, above-the-line deductions have the advantage in that you can take them even if you don’t itemize on Schedule A and they reduce your AGI. Other calculations throughout your tax return are based on your AGI; these calculations include deductible medical expenses and various credits.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.