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2021 Year End Tax and Investment Moves Thumbnail

2021 Year End Tax and Investment Moves

Financial Planning

What has changed for you in 2021?

After  the rollercoaster year of 2021, we are all anxiously awaiting  2022. For some this year has brought about many changes and opportunities. Did you start a new job? Decide to retire? Sell your business? Get married, have a baby? If notable changes look place in your personal or professional life, then you may want to review your finances before this year ends. It is never too late to make changes in 2021 which might put you in a better position next year.

Keep in mind that this article is for informational purposes only and is not a replacement for real-life advice. Please consult your tax, legal and accounting professionals before modifying your tax or investment strategy.

Even if your 2021 has been relatively uneventful, the end of the year is still an excellent time to plan  and see where you can improve your overall personal finances.  For 2021, the following tax rates  apply1:

Tax rate

Taxable income brackets:

Single filers

Taxable income brackets:

Married couples filing jointly (and qualifying widows or widowers) 

10%

$0 to $9,950

$0 to $19,900

12%

22$9,951 to $40,525

$19,901 to $81,050

22%

$40,526 to $86,375

$81,051 to $172,750

24%

$86,376 to $164,925

$172,751 to $329,850

32%

$164,926 to $209,425

$329,851 to $418,850

35%

$209,426 to $523,600

$418,851 to $628,300

37%

$523,601 or more

$628,301 or more

Do you want to itemize deductions?

The  standard deduction has risen for the 2021 tax year to $12,550 for single filers and $25,100 for joint. If you think it might be better for you to itemize, now would be a good time to gather the receipts and assorted paperwork.2,3

The  deduction for state and local income taxes, property taxes, and real estate taxes remains  capped at $10,000. Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2021. The Consolidated Appropriations Act extends the cash donation limit of 100% of AGI, which was enacted under the CARES Act. No miscellaneous itemized deductions are allowed in 2021.

Are you thinking of gifting?

How about donating to a qualified charity or non-profit organization before 2021 ends? Your gift may qualify as a tax deduction. For some gifts, you may be required to itemize deductions using Schedule A.4  Another option if you are age 70.5 or older is a Qualified Charitable Distribution of up to $100,000 directly from your IRA to a qualified charity . The distribution counts toward your RMD requirement and is income tax-free, however it is not eligible for a charitable deduction.

Prior to the holiday's is a good time to take a moment to review a portion of your estate strategy? Again this year, you can gift up to $15,000 per person to your loved ones without incurring gift taxes.

If you haven’t reviewed your beneficiary designations for some time, double check to see that these assets are current and structured to reflect your current goals.  Lastly, look at your will to make sure it is still valid and up-to-date in the event you pass away.   

Do you engage in tax-loss harvesting?

That’s the practice of taking capital losses (selling securities less than what you first paid for them) to manage capital gains.5 You might want to consider this move, but it should be made with the guidance of a financial professional you trust.6

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that amount can be carried forward to offset capital gains in upcoming years.6 

How about gain harvesting? Depending on your marginal tax bracket a multi year strategy of accelerating gains while your tax bracket is low may actually lower your overall tax burden.

What can you do before ringing in the New Year? 

While we are on the topic of year-end moves, check on the amount you have withheld. If you discover that you have withheld too little on your W-4 form so far, you still have time to  adjust your withholding before the year ends.

Make sure you’re taking full advantage of any company-sponsored retirement plans available to you. In addition to contributing enough to capture any company match, consider maximizing your 401k contribution. The 2021 maximum is $19,500 plus or those turning age 50 or older are eligible for catch-up contributions of $6,500.

If you are eligible for a Health Savings Account (HSA) make sure you contribute  before year end.7  You can contribute up to $3,600 in 2021 if you have self-only coverage or up to $7,200 for family coverage. If you're 55 or older at the end of the year, you can put in an extra $1,000 in catch up contributions.

Do not forget if you are age 72 or older, you must take your required minimum distribution (RMD) before year end.8 Be careful, if you miss the deadline, the penalty is 50% of the amount that should have been withdrawn.

As 2021 comes to a close you may be eager to say goodbye to the old year and welcome the new. Before you say goodbye, though, consider speaking with a financial or tax professional. Do it now, rather than in February or March. Small end-of-year moves might help you improve your short-term and long-term financial situation.

  1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021
  2. https://www.nerdwallet.com/article/taxes/standard-deduction
  3. https://www.investopedia.com/terms/s/standarddeduction.asp
  4. https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp
  5. https://tobininvestmentplanning.com/financial-tips/tax-loss-harvesting-opportunities-and-obstacles
  6. https://www.investopedia.com/articles/taxes/08/tax-loss-harvesting.asp
  7. https://tobininvestmentplanning.com/financial-tips/healthcare-can-cost-thousands-can-an-hsa-help
  8. https://tobininvestmentplanning.com/financial-tips/required-minimum-distributions-whats-changed-for-2021