2021 Year-End Tax Planning Checklist

If you could travel through time, it probably wouldn’t be to visit your future self next April as you do your taxes. But next April, you might wish for the ability to travel back in time to 2021 and take some actions to make that tax preparation easier and more fruitful. Since you’re here right now, why not take advantage of the opportunity to do some year-end tax planning? Here’s a checklist to help you take some steps you will be glad about come tax season.

Make Some Charitable Donations

Donating to charity used to be a favorite way to rack up deductions and reduce the amount of income that got taxed. When the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, a lot of people decided it was no longer worth it to itemize their deductions. An unfortunate side effect of that decision was that some people may have made fewer cash donations to charity than in the past.

However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created an incentive to give cash to charity in 2020: taxpayers were allowed to deduct up to $300 in cash donations to charity even if they didn’t itemize deductions. For tax year 2021, the deal is even sweeter: you can deduct up to $300 per person, meaning you and your spouse can deduct up to $600 if filing jointly.

Contribute to Your 401(k) or HSA

If you have a traditional 401(k), you can make tax-deductible contributions of $19,500 for 2021; add $6,500 to that cap if you’re 50 or older. You can also deduct up to $7,250 in contributions to a health savings account (HSA) for the year if you have a qualified high-deductible family health insurance plan (if you have self-only coverage, the limit is $3,600). The maximum deduction increases by $1,000 for those aged 55 and up.

You actually have until April 15, 2022 to make your HSA contributions, but your ability to contribute to your 401(k) for 2021 ends when the year does, so max out your contribution before the ball drops on New Year’s Eve.

You actually have until April 15, 2022 to make your HSA contributions, but your ability to contribute to your 401(k) for 2021 ends when the year does, so max out your contribution before the ball drops on New Year’s Eve.

Take Your 2021 Required Minimum Distribution

The CARES act temporarily waived the need to take a required minimum distribution (RMD) from traditional IRAs and some other employer-sponsored plans for 2020, but the requirement is back for 2021.

Thanks to changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, if you turned 70 on July 1, 2019 or after, you do not need to take your first RMD until age 72. If you are required to take a distribution, plan to do so. Failure to take an RMD results in a 50% penalty — not trivial! If you haven’t taken it yet, be sure to schedule it before year’s end.

Make 529 Plan Contributions

If you have children or grandchildren you hope will attend college, consider contributing to a 529 plan on their behalf before the end of the year. Contributions to a 529 plan grow tax-free while invested, and can be withdrawn tax-free if used for qualified education expenses. And while you can’t deduct contributions to a 529 plan from your income for federal taxes, you may be able to deduct them on your state income tax return.

Harvest Capital Losses (Appropriately)

If some of your stocks have lost money in 2021, you can sell them and deduct up to $3,000 of the capital loss on your federal income tax. The loss may offset capital gains from the sale of other stock or just reduce your income.

Don’t try to be clever and immediately repurchase the stock at the lower price. Doing so would violate the “wash-sale” rule, which says you may not deduct capital losses if you repurchase stock, or buy substantially similar stock, within 30 days after selling at a loss.

That said, the wash-sale rule does not (yet) apply to cryptocurrencies. So if you invested in cryptocurrencies only to see them tank in 2021, you can sell them at a loss, turn around and buy them back, and still deduct the loss on your taxes — at least until the IRS closes this loophole.

Convert Funds From Your Traditional IRA to a Roth IRA

Contributions to a traditional IRA are made pre-tax, but you pay tax on withdrawals. Contributions to a Roth IRA are made with money that’s already been taxed, but withdrawals are tax free. And unlike a traditional IRA, you don’t have to take RMDs from a Roth IRA.

You can also convert money from a traditional IRA to a Roth IRA, so long as you pay tax on the amount you convert. With some experts concerned that tax rates will rise, it may make sense to make any conversions you are thinking about now, while tax rates are relatively low.

Talk to Your Tax Advisor About Year-End Tax Planning

Before taking any actions, you should talk to your tax professional. He or she may be able to recommend other measures you can take before the end of the year to make filing taxes in April less painful. There’s nothing worse than finding out that there’s something you could have done to save money on your taxes — if only you’d known about it in time.

If you have questions about year end tax planning in Michigan, or want to make a tax planning checklist customized to your situation, contact our law office to schedule a consultation.