As we approach the end of 2021, it is important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation including the continued global pandemic, remote and new hybrid work models, supply chain disruptions and rising inflation.
Now is the time to take a closer look at your current tax strategies to make sure they are still meaningful in today’s world and to take any last-minute steps that could save you tax dollars. While looming tax law changes have not been finalized, many tax planning opportunities still exist! Here are some issues to consider as we approach year-end.
Many tax provisions were implemented under the American Rescue Plan Act, which was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Below is a summary of the highlights of some of these changes:
Economic Impact Payments (EIPs)
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return.
If you received an EIP as an advance payment, you should receive a letter from the IRS. Please keep this for record-keeping purposes and include it with your tax documents to help us determine any potential adjustments that may be necessary in preparing your 2021 income tax returns.
Child Tax Credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as:
- The amount of the credit has increased for certain taxpayers
- The credit is fully refundable (meaning taxpayers will receive a refund of the credit even if they do not owe the IRS)
- Half of the credit may have been received in monthly payments beginning in July 2021
- The credit is applicable to children age 17 and younger
If you received monthly advanced payments of the Child Tax Credit, the IRS will issue a tax form in early 2022 disclosing the amount of payments you received which will be needed for tax preparation purposes.
Charitable Contribution Deductions
Individuals who do not itemize their deductions can take an above the line deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100 percent of their adjusted gross income (AGI) in 2021 (up from 60 percent) for cash donations to 501(c)(3) organizations. There are many tax planning strategies we can discuss with you in this area as the value of charitable deductions may increase in the future if individual income tax rates increase.
Required Minimum Distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reached that age before Jan. 1, 2020). Distributions may also be required from inherited, or beneficiary IRAs. Plan ahead to determine the tax consequences of RMDs, especially for those in their first year of RMDs.
Another thing to note that is different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021.
What Lies Ahead?
There are many other opportunities to discuss as year-end approaches and pending new tax legislation comes into focus. Depending upon your individual circumstances, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position. The following are a few items for consideration:
Consider maximizing deferrals to retirement accounts such as 401(k) or IRAs to reduce current taxable income
- Consider utilizing tax benefits related to using capital losses to offset realized gains
- Consider utilizing appreciated securities or Qualified Charitable Distributions (QCD) from IRAs for charitable giving
- Consider utilizing the annual exclusion for gifts of $15,000 per donee to help save on estate taxes
- Consider using tax advantaged Section 529 plans to help save for education
- Consider maximizing contributions to Health Savings Accounts (HSA) to utilize pre-tax dollars for medical expenses
- Consider the tax consequences of converting traditional retirement accounts to Roth IRAs
- Consider the state and local tax implications that remote working arrangements may have this year
In addition, be sure to let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures such as real estate purchases, college tuition payments, etc.
Whether it is working toward retirement or getting answers to your tax and financial planning questions, we are here for you. Please contact our office today at 216-831-0733 to schedule your year-end review meeting. As always, active tax planning can help you minimize your tax bill and position you for greater financial success!