Year-end tax questions are those questions to ask yourself, your accountant, or your Certified Financial Planner™ this time of year. Asking the questions in early November provides time to make year-end decisions before it’s too late. Some decisions can wait until Christmas week, but several are best done with a few weeks to spare.
Generally, they fall into 3 categories:
Year to date income?
Year to date deductions? and
What to do now?
Year to Date Income?
First, figure out your year to date income. How much have you made year to date? What does it look like you will make for this year? Common items that are forgotten:
- Capital gain distributions from mutual funds (More info here: https://www.hollydonaldsonfinancialplanner.com/fourth-quarter-tax-help-check-your-fund-distributions/)
- Bonuses, including stock grants or options
- Quarterly dividends on stocks and ETFs
- Quarterly interest on individual bonds
- Capital gains on assets sold
- Required distributions from IRAs or 401Ks
Year to Date Deductions?
Next, look at year to date deductions. Everyone gets a 2021 standard deduction of $12,550 Single/$18,800 Head of Household/$25,100 Married Filing Jointly. Other deductions to consider, or if you itemize:
- $300 charitable contribution (available even if you take the standard deduction)
- Unusual/high medical expenses
- Long term care premiums (Depends on your age – see chart here: (https://www.aaltci.org/news/long-term-care-insurance-association-news/2021-tax-deductibility-limits)
- “Harvesting” losses that might offset unusually high capital gains
What To Do Now?
Finally, the goal with tax planning is to avoid reporting taxable income that’s barely over some kind of threshold or bracket. For example, though a bit extreme: A couple in their 60s with one spouse still working and one over 65 on Medicare reports $177,000 in 2021 taxable income. This is $1,000 over the threshold of $176,000 for the first (of 6) Medicare income brackets. The additional $1,000 in income costs the couple $713 in Medicare premium surcharges in 2023. That’s a marginal tax rate of 71.3%!
If your taxable income is on a critical tax threshold, you can strategize. A few easy examples:
- Make sure you have maxed out your retirement account contributions for the year.
- Or, turned 50? You get an extra catchup contribution to your retirement account.
- Turned 55? You get an extra catchup contribution on a Health Savings Account (HSA). (More info here: Why an HSA Beats an IRA Any Day)
- If you show business income, can you defer income or accelerate expenses between December and January?
- If you believe you are in a lower tax bracket now than you will be in retirement, and additional income won’t bump you up against any of the other thresholds, consider a Roth conversion. But do it soon. It can take several weeks to accomplish, depending upon which company holds your accounts. And year-end gets busy for these.
Charitable Giving Options
- If you are over 70 1/2, would it make sense to make a Qualified Charitable Distribution from your IRA? (More info here: https://www.hollydonaldsonfinancialplanner.com/keep-charitable-deduction/)
- Instead of giving cash to charities, give them an asset with a large capital gain. You get a deduction instead of showing the gain.
- Need a deduction but not sure which charity(ies) yet? Set up a donor-advised fund, get the deduction now, and decide later which organization to give to. (More info here: https://cftampabay.org/?s=donor+advised+fund or here: https://www.fidelitycharitable.org)
Have a Year-end Tax Planning Meeting
Consequently, meeting with your accountant or Certified Financial Planner™ now might help you discover whether you are on the border of one of the many confusing tax code thresholds. Then you can decide what to do about it before it’s too late.
Schedule a 30-minute call to talk more about tax planning or money topics: https://bit.ly/3GWZNrc