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2021 Year-end Tax, Estate, Investment, and Financial Planning Moves You Should Consider Making

As 2021 comes to a close and we head into 2022, it’s a great time to think about planning ahead to consider tax strategies while staying on track to meet your personal financial planning goals.

Last year’s global pandemic continued into 2021, and we’ve witnessed uncertainties in policy and tax legislation. Although there has been some resulting volatility within the financial markets, it’s been another historic year for equities thus far.

The following checklist will help you to identify important action items to consider as part of your 2021 year-end income and transfer tax planning as well as preparing for 2022. We would appreciate the opportunity to talk with you about how these might fit into your unique and personal situation; you may schedule a meeting with us here.

One main caveat that spans much of the below-mentioned planning items is that there’s still uncertainty regarding proposed legislation surrounding income and estate taxes. Careful consideration will need to be given and perhaps even a “wait and see” approach taken until we receive further clarity.

Income tax planning:

Remember to send in capital gains and investment income information to your CPA for the most accurate year-end projection. Additionally, gather information regarding any crypto assets to ensure that any filings for the holding, purchase, or sale of crypto assets are complied with. Because of potential tax law changes this year, 2021 might be the last year you can make mega and regular backdoor Roth conversions.

  • Harvest capital losses to offset realized gains and rebalance your taxable investment accounts.
  • Consider harvesting any capital gains that can be realized in the 0% tax bracket (available to lower income filers).
  • Review charitable contributions to maximize income tax deductions.
    • Consider donating appreciated assets that have been held for more than one year, rather than cash.
    • Opening and funding a Donor Advised Fund (DAF) is appealing to many as it allows for a tax-deductible gift in the current year and also the ability to dole out those funds to charities over multiple years.
    • Qualified Charitable Distributions (QCDs) are another option for those over 70.5 and especially for those who don’t typically itemize on their tax returns.
  • Weigh the benefits of converting your Traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts.
    • Remember that Roth conversions can no longer be recharacterized so there’s no reversing once executed.
    • Keep in mind that Roth conversions will be more beneficial when the tax can be paid by funds outside of the IRA.
    • Remember that all IRA balances are included in the tax calculation of the conversion limiting the ability to only convert after-tax amounts.
  • Maximize your contributions to a retirement plan, SEP IRA or individual 401(k) (if you are self-employed) and Health Savings Account.
  • If you are 72 or older or are a beneficiary of an applicable inherited IRA, take the required distributions before December 31, 2021.
  • If you expect your income to increase in the future, consider making Roth 401(k) contributions.
  • Review income tax withholding on your retirement account distributions and make any desired changes for the new year.
  • Review the timing of income and deductions.
    • With provisions of the Build Back Better Act still in flux, it’s still likely that tax rates will be increasing so it may be attractive to accelerate income into 2021 and defer deductions to 2022 when they will be more valuable.
    • If you are on the threshold of a tax bracket.

Estate/Gift tax planning:

  • Make use of annual exclusion gifts ($15,000 per donee, $30,000 per married couple) to help save on potential future estate taxes.
  • Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses.
  • Consider gifting to a 529 plan by year-end if saving for a child's or grandchild's education.
    • Many states offer tax deductions for residents contributing to their state programs.
    • Consider gifting up to 5 years of the annual exclusion amount to an individual’s 529 plan and with the filing of a gift tax return, elect to treat it as if it were made evenly over a 5-year period, gift tax-free.
  • Review lifetime gift and generation-skipping tax (GST) gifting opportunities to use additional applicable exclusion and exemption amounts.
    • While there’s less optimism it gets passed now, the Build Back Better Act targets the lifetime gift and GST exemptions which could decrease them from $11.7 million per person (current) to approximately $6 million beginning in 2022.
  • Consider intra-family loans and opportunities to leverage the current low-interest-rate environment.
  • Depending on whether the Build Back Better Act is implemented, grantor trusts such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and many other types of powerful wealth transfer vehicles could be rendered less impactful as a planning tool.

Retirement, Investments and other planning

  • 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, changes in residency, and significant planned expenditures (real estate purchases, college tuition payments, etc.).
  • Update pre-tax and Roth contributions to retirement accounts for 2022.
  • Review your various insurance policies and confirm whether the amount of coverage and deductibles are still adequate.
  • Review beneficiary designations with your custodian and update, as necessary.
  • Confirm that you have spent or have a plan to spend the entire balance in your Flexible Spending Accounts (note: your employer's plan might allow you to carry a balance into next year) and set 2022 contribution amounts.
  • Review your investment portfolio and target asset allocation. Confirm whether you are within the targeted ranges for each asset class as recent market performance could have caused allocations to drift dramatically.
  • Review any scheduled 4th quarter estimated tax payments and assess any liquidity needs.
  • Consider an additional tax payment or increase in tax withholdings to eliminate a penalty.
  • Evaluate progress towards financial goals.
  • Plan for the unique change for IRA and 401(k) required minimum distributions in 2022 and beyond. With the change in the lifetime expectancy factors, required minimum distributions (RMDs) amounts could be somewhat smaller than prior years.

The decisions you make each year with your personal finances will have a lasting impact. We hope this information has begun to generate some insight to areas of your personal finance that need attention. This year-end, more than most, will require some flexibility given the potentially material changes coming down the pike for income and estate taxes. We would be honored to help you navigate the complexities of your financial situation. Please schedule a meeting with us if you are ready to talk through year-end planning.

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