Tax Moves for Year End

Year-end tax planning is more complicated this year, but these simple ideas can help you achieve your long-term retirement, estate and charitable goals.

Year-end tax planning has become more complicated this year, between provisions from pandemic bills that are about to expire and proposals in the Build Back Better Act that are working their way through Congress. But there are  planning strategies – some that are useful any year and others that might be specific to 2021 – that can help your bottom line before the end of the year. Here are a few things to consider:

Retirement Planning

  • One of the tax strategies that has been discussed as a possibility for elimination is the backdoor Roth IRA conversion, which allows those whose income exceeds the Roth contribution limits to fund a Roth through a Traditional IRA. If you have been thinking about a backdoor Roth strategy, be sure to complete that conversion before the end of the year.
  • Required minimum distributions from retirement accounts were suspended last year, but they’re back in force for 2021, so be sure to take that withdrawal before the end of the year.  If you turned 72 this year, you have until April 1, 2022, to take your first RMD.
  • If you have the assets, it’s always a good idea to top up your tax-sheltered retirement accounts, such as a 401(k) or traditional IRA, especially if you reduced your contributions during the pandemic.

Charitable Giving

  • In years past, you could only take charitable deductions if you itemized your deductions. However, pandemic-era bills now allow you to deduct up to $300 ($600 for joint filers) in cash contributions through the end of 2021 for those who don’t itemize. For larger gifts to be tax-deductible, you must itemize rather than take the standard deduction, which for married couples filing jointly is $25,100 this year.
  • In earlier years, the deduction for cash contributions given directly to a public charity were limited to 60% of your adjusted gross income. The CARES Act raised this figure to a full 100% of your AGI, but that’s slated to expire at the end of 2021.
  • To get more efficiency from your charitable contributions, try to bunch your donations into one year to get over the standard deduction threshold. One convenient way to bunch those donations is through a donor-advised fund, which allows you to put your donations into a fund that doles out the money to charities over time.

Estate Planning

  • Take advantage of the annual gift tax exclusion, which currently allows you to give up to $15,000 to anyone without treating it as a taxable gift. A married couple can give a combined $30,000 to each child, $15,000 from each parent.
  • While attempts to reduce the $11.7 million lifetime estate tax exemption for 2022 appear to be off the table as of now, the exemption remains on schedule to be reduced in 2026.  Those looking to take advantage of the larger exemption before then should begin discussing and implementing planning strategies now.

If you would like to move on any of these tactics before the year runs out, or if you’re considering other moves that might help with your long-term financial picture, your Baird Financial Advisor team would be happy to assist you.

Baird does not provide tax or legal advice. Please consult your legal or tax professional for specific information.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.