Year-End Tax Tips for 2021

By Tom Taylor | December 20, 2021

As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought up questions that significantly impact your personal and financial situation.

Now is the time to work on your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money. We’re here to help you take a fresh look at the health of your tax and financial well-being. Connect with us to discuss your personal goals and strategy so we can develop a customized plan together. In the meantime, here’s a look at some things to consider as we approach year-end.

Key Tax Considerations from Recent Tax Legislation

Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you understand what they were and how we can plan for the future.

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, and we can help you plan for any modification now.

Advance EIPs received are based on your 2020 tax filing. If you received an EIP payment in 2021 but did not qualify for all of it, you may have to pay it back with the return filing (through balance due or reduction of refund due).

If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment.

Child Tax Credit

As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:

Amount has increased for certain taxpayers
Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)
May be partially received in monthly payments
Applies to children aged 17 and younger

The IRS began paying half of the credit in advance monthly payments beginning in July. Some taxpayers chose to opt-out of the advance payments, and some may have complexities that require additional analysis. We will need to know whether or not you received advanced payments and how much you received. We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.

Charitable Contribution Deductions

Individuals who do not itemize their deductions can take a 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. Qualified charitable deductions are still a good strategy for lowering your tax liability. Same with using RMD’s to fund charitable contributions.

Taxpayers can claim a charitable deduction of up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%) for cash contributions made directly to a public charity. We can discuss many tax planning strategies to take advantage of this increase.

Another charitable planning strategy is Gifting Appreciated Stock to Charity. By donating stock that has appreciated for more than a year, you are actually giving 20 percent more than if you sold the stock and then made a cash donation. The reason is simple: avoiding capital gains taxes. The maximum federal capital gains tax rate is 20 percent on long-term holdings and there are discussions that it may be increasing next year.

Annual Gifting

The annual gifting tax limit for 2021 is $15,000. That has increased to $16,000 for 2022. We recommend making annual gifts early in the year in case there is a law change. 2021 is the last year to deduct 100% of your charitable contributions against your AGI, effectively making your tax zero.

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 reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.

Unemployment Compensation

Another thing to note that’s 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. We can help you plan for any potential impact of this change.

State Tax Obligations Related to Teleworking Arrangements

The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer.

Roth 401k Five-Year Rule

If you are within five years of retirement and have a Roth 401k, you should move a small amount out of the Roth 401k and into a Roth IRA to start your five-year clock on the five-year rule. The five-year rule for Roth IRA distributions stipulates 5 years must have passed since the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account tax-free. Money moved from a Roth 401k to a Roth IRA starts the five-year clock.

Virtual Currency/Cryptocurrency

The last two years have seen explosive growth in US consumer interest in crypto-currency transactions, purchases and use. Congress and the IRS have both become aggressively involved in monitoring the activities and the failure to correctly report crypto, and on November 15th the President signed legislation to track these activities.

For Example: One penalty for failure to report crypto activities can be 50% of the highest balance in the account each year.

Unfortunately, very few consumers understand the income tax and foreign reporting obligations that accompany crypto-currency activities, and the incorrect and misleading information floating around on the internet is a major concern.

Here are the seven activities that require individual transaction reporting in addition to just reporting the existence of the account. You read that correctly, each individual transaction must be individually reported. For example, if you use a cryptocurrency to buy a cup of coffee, we must report that transaction individually on your return.

Selling (Converting) crypto to US Dollars
Trading one crypto for another
Spending crypto directly for goods or services
Mining crypto from your computers
Staking or lending crypto and receiving payment in crypto or dollars
Receiving Airdrop crypto
Getting paid in crypto

Items 1, 2, and 3 require that we report each transaction separately on your return. Potentially hundreds or thousands of transactions must be reported if you are spending cryptocurrency, trading (even via a “Bot”), mining, etc.

This year we are going to remind you in our organizers, interviews, and engagement letters that these actions must be disclosed so that we may report them, and you can avoid penalties.

Additional Tax and Retirement Planning Considerations

We recommend you review your retirement goals and plan at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs, and company retirement plans. It is also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future.

Here are a few more tax and financial planning items to discuss with us:

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 (real estate purchases, college tuition payments, etc.).
We’ll consider tax benefits related to using capital losses to offset realized gains and move any gains to the lowest tax brackets, if possible.
Work together to plan appropriately for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes.
Discuss Sec. 529 plans to help save for education; there can be income tax benefits to do so, and we can help you with any questions.
Review any updates needed to insurance policies or beneficiary designations.
Determine the taxable impact of converting traditional IRAs to Roth IRAs or using a back door Roth strategy
Let’s review withholding and estimated tax payments and assess any liquidity needs.
Don’t pay property taxes and last quarterly state estimated income taxes until January because they may be deductible again in 2022.

Fraudulent Activity Remains a Significant Threat

Our firm takes data security very seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Call us immediately if you:

Receive a notice or letter from the IRS regarding a tax return, tax bill, or income that doesn’t apply to you. Do not contact them and send the notice to us.
Get an unsolicited email or another form of communication asking for your bank account number, other financial details, or personal information.
Receive a robocall insisting you must call back and settle your tax bill.

Important Cyber Security Tips

It’s strongly encouraged that you follow these cyber security best practices:

Update all of your passwords at least once a year.
Use an encrypted password vault like LastPass, and you’ll never need to remember a password again.
Use a minimum of 12 characters with a combination of special characters, capital letters, and numbers. We recommend using a phrase that you’ll easily remember. For example, “I grew up on Bayberry Lane in Maryland”. The password would use the first letter of each word and replace “I” with 1 and “O” with 0 (Zero). Then you can add a few numbers to the end along with a special character. Password: 1Gu0BLiM967!
Turn on two-factor authentication (2FA) for all financial websites and preferably any website or application that offers it.
Regularly check for updates on each of your devices and download them as soon as they’re available. They often include security updates, which makes these updates vital to securing the device.
Never click on unsolicited email links.
Never – ever – include personal information like date of birth, social security numbers, or bank account information in an email.

You must take action to keep your personal financial information safe. We’re happy to walk our clients through implementing these cybersecurity best practices or review anything you suspect could be fraudulent.

Key Numbers for 2021 and 2022

Tax and retirement reference numbers are as follows:

401k/403b Contribution Limits

2021	2022
$19,500 (Age 50+ Catch Up $6,500)	$20,500 (Age 50+ Catch Up $6,500)

Traditional and Roth IRA Contribution Limits

2021	2022
$6,000 (Age 50+ Catch Up $1,000)	$6,000 (Age 50+ Catch Up $1,000)

Roth IRA Income Limits

	2021	2022
Single & HOH	$125,000	$129,000
Married	$198,000	$204,000

Heath Savings Accounts

	2021	2022
Single/Family	$3,600/$7,200	$3,650/$7,300
Age 55+ Catch Up	$1,000	$1,000

Standard Mileage Rate

2021	2022
$0.56	TBD

Annual Gift Tax Limit

2021	2022
$15,000	$16,000

Year-End Planning Equals Fewer Surprises

There are many other planning opportunities to discuss as year-end approaches. And, many times, 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.

Whether it’s working toward retirement or getting answers to your tax and financial planning questions, we’re here for you. As always, planning can help you minimize your tax bill and position you for greater success.