Year-End Tax Planning: Smart Strategies to Consider Before the New Year

December 9, 2021

As we close in on the (merciful) end of 2021, it is a long-standing tradition to examine each individual’s tax situation to discover any opportunities to save current or future income taxes. As is true with most things in 2021, such an examination is made much murkier than normal given the uncertain prospects for the Build Back Better Act currently going through the sausage making process on Capitol Hill.

Consider Accelerating Income Into 2021

Despite that murkiness, there are several points for individuals to keep in mind as the year end approaches. First, the prospect of higher individual rates for 2022 and beyond. With that being the case, taxpayers should consider accelerating income into 2021 for ordinary income as well as capital gains. While currently open to some doubt, the consensus seems to be that rates will increase, especially for high income taxpayers. In addition, the opportunity zone investment deadline is December 31. It applies to the five-year, 10% basis adjustment and gain exclusion before 2026.

Retirement Plan Contribution Considerations

Taxpayers should also be looking toward retirement plan contributions for 2021. This year, the limit for a tax deductible contribution to 401(k) and 403(b) plans is $19,500 and $26,000 for taxpayers 50 years old and older. The age to begin Required Minimum Distributions (RMD) was raised to 72 from 70 ½ by the Covid relief legislation. A taxpayer’s first year RMD may be delayed to April 1 of the year following the year the taxpayer turns 72. In addition, if proposed legislation passes in its current form, 2021 be the last year to convert non-Roth after-tax savings in qualified plans and IRA’s to Roth accounts.

Make Maximum Use of Estate and Gift Tax Exemptions

Under the latest version of the Build Back Better Act, estate and gift tax rates will remain the same for at least for 2021 and 2022. That means there will be no changes to the current unified estate and gift tax per person exemptions of $11,700,000 for 2021 and $12,060,000 for 2022. As things stand currently, taxpayers are encouraged to make maximum use of these exemptions as they are scheduled to be reduced significantly after 2025.

The foregoing are just a few suggestions for year-end consideration. KJK will be providing a more in-depth analysis of the tax provisions of any last-minute legislation, when and if passed by Congress and signed by the President.

If you have questions or would like to discuss further, please reach out to Kevin O’Connor at kto@kjk.com or 216.736.7213.