Another year is in the review mirror and what a year it has been! The stock market is up (and down), inflation is rising, and interest rates remain low. You may be under or over employed, working from home, or commuting. This year’s challenges may create opportunities for last-minute tax savings, so it is always good to have a plan.
There are still some last-minute tax planning ideas you can do even with just a few days left. With significant unknowns around potential tax law in 2022, it may be best to take advantage of what you can for 2021.
- Review your investments for gains if you want to trim profits and utilize the current long-term capital gains rates. You can also harvest losses if you are in the camp of looking for deductions yet this year.
- Determine if this year is the perfect time to convert some of your pre-tax money to a Roth IRA. Low current tax rates, along with low income if your job was eliminated this year, could provide you with a long-term, tax-free benefit.
- Contribute to a SEP, IRA, or Solo 401(k) or max out your last paycheck on 401(k) contributions.
- Consider paying your estimated state income taxes in December instead of January. There may still be a chance that the deduction limit for state and local tax (SALT) may be increased before year-end.
- If the Build Back Better legislation does pass with the increased SALT limit, consider paying your property tax in December instead of next April to take a bigger deduction this year. Then next year, you would have no property tax due, but you can still take the standard deduction.
- Consider charitable donations, especially if you are able to itemize. If you have a large income tax bill, you can even open and fund a donor-advised fund before year-end. This allows you to take the full tax deduction this year, while providing plenty of time in the future to plan out which charities receive donations.
- Don’t forget to take your required minimum distribution (RMD) if you are age 72 or older. You did not need to take one last year due to COVID, so it may not be on your radar. However, there is a 50% penalty for not taking the correct amount. Also, don’t forget you can send all or part of your RMD to charity, up to $100,000, even without itemizing your taxes.
- Review your qualified business interest deductions if you own a small business. You may be eligible to fully deduct up to 20% of your business income. This gives you an instant benefit if you are eligible.
- You may want to make a large purchase for your business as this year’s Section 179 is higher than it has ever been, up to $1,050,000. This allows you to write off an eligible business expense instead of depreciating it over time.
Now it is time to enjoy the holidays and get ready for next year. The retirement plan contributions will increase by $1,000 for 401(k)s to $20,500 plus the $6,000 catch up for those over age 50. IRA and Roth IRA limits remain unchanged at $6,000 plus a $1,000 catch- up contribution. Make sure you are eligible to deduct your IRA based on your income and employer retirement plans.
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser.