2021 Year-End Planning Guide

2021 Year-End Planning Guide

November 15, 2021

Another calendar year is passing us by with lightning speed. As we flip the calendar towards 2022, there’s still time to make a few last-minute adjustments to improve your finances.

Here are 9 impactful planning ideas to consider between now and the end of the year.

1. Maximize Your Retirement

The IRS has released their Contributions and Benefit Limits for 2022. 401(k) participants will be getting a bump in their maximum contributions by $1,000 to $20,500. Catch-up contribution for those age 50 or older will remain at $6,500.

Surprisingly, contribution limits to Traditional and Roth IRAs remains unchanged at $6,000.

Planning Tip:

Don’t forget to maximize your 401(k) contribution for the year. And, if you are 50 years or older (or will turn 50 years old anytime during 2021), you are also eligible for the catch-up contribution! Make sure you have contributed both the $19,500 deferral and the $6,500 catch-up maximum for this year. Then, in January, you can elect to defer the new higher amount in 2022.

2022 Contribution and Benefit Limits

You can download this chart for future reference here.

2. Maximize Your Health Savings Account (HSA)

HSAs can be a powerful savings tool for high income families. In fact, they are the only investment vehicle that delivers triple-tax benefits: contributions are tax-deductible, earnings grow tax-deferred, and withdrawals are tax-free when used for qualified medical expenses.

You can read more about how high-net-worth families use HSAs here.

HSA Contribution Limits

If you are covered under a high-deductible-health-plan you have until the end of the year to maximize your contribution.

For 2021, a high-deductible-health-plan is defined as one which requires minimum annual out-of-pocket deductibles of $1,400 for an individual and $2,800 for families. Yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) cannot be more than $7,000 for an individual or $14,000 for a family. You also must not be enrolled in Medicare, covered by another health plan that is not a high-deductible-plan, or claimed as a dependent on someone else’s tax return.

Planning Tip:

You have until April 15th to maximize contributions and have them count for 2021.

3. Maximize Your Charitable Contributions

In 2021, the standard deduction increased to $12,550 for single filers or $25,100 for married filing jointly. To take advantage of itemized deductions such as mortgage interest, state and local taxes (SALT), and charitable contributions, the total of these deductions must exceed the standard deduction.

If you’ve had an uncharacteristically high income this year, you can use charitable bunching by making a larger than usual tax-deductible contribution to a Donor Advised Fund (DAF). Bunching allows you to advance your next few years of charitable gifts into the current tax year. The aim is for this deduction to exceed the standard deduction so you can minimize your taxes today. In future years, you can direct your DAF to make gifts to charities on your behalf with the timing and dollar amount of your choosing.

You can read more about DAFs and making the most of your charitable contributions here.

Planning Tip:

Cash is not always the most efficient asset to give to charity. Consider donating highly appreciated securities to a Donor Advised Fund to minimize taxes and maximize your charitable contribution.

4. Required Minimum Distributions and IRA Contributions

The SECURE ACT, which was signed into law in 2019, provides two enhancements for retirees and pre-retirees.

•             Required Minimum Distributions (RMDs) from IRAs/401(k)s were pushed back to age 72. This allows an extra 1 ½ years of additional compound growth and tax deferral.

•             Contributions to Traditional IRAs can be made at any age. Under the old rules, contributions were disallowed after reaching 70 ½. If you earned income and have a desire to pad your Traditional IRA, there’s still time to make a contribution prior to April 15th.

Planning Tip:

If you turned 72 years old in 2021, you have until April 1st of 2022 to take your first RMD. Subsequent RMDs must be taken by December 31st annually thereafter.

5. Gifting to Loved Ones

Changes to the estate and gift tax laws are always in the crosshairs of politicians and this year was no exception. However, at the time of this writing, no concrete changes have been approved by Congress. In fact, the estate tax exemption is scheduled to rise to $12,060,000 per person in 2022.

On September 13th, the House Ways and Means Committee released their proposal on how to raise revenue. In it, they recommended cutting the gift and estate exemption amount approximately by half to $6,000,000.

Also, grantor trusts such as GRATs, ILITS, SLATs, IDGT, and QPRTS would be rendered ineffective planning techniques going forward.

There is no way to know whether this will become law this year, next year, or never.

If your estate is north of $12,000,000 (individual) or $24,000,000 (couple) it may be a good time to revisit your plans with your estate attorney to determine if large gifts make sense for your situation. Even in the absence of new legislation, the increased exemption amounts are scheduled to be reduced in January of 2026.

Remember, too, that anyone can give up to $15,000 of tax-free gifts per person each year. (This limit gets a boost in 2022 to $16,000.) Annual gifts do not rollover, so make your gifts before year-end.

Planning Tip:

Since the annual gifting limit is $15,000 per person, a husband and wife with two married children and four grandchildren could gift a total of $240,000. (That’s $15,000 to each of the 8 family members, from both husband and wife, or $30,000 x 8!)

Estate and Gift Tax Exemption

6. Make a Qualified Charitable Distribution (QCD)

One of the most exciting aspects of the Pension Protection Act of 2006 was the Qualified Charitable Distribution, or QCD. A QCD allows you to make a charitable donation up to a maximum of $100,000 per person/per year to a charity, with the amount donated directly offsetting the Required Minimum Distribution.

High-net-worth individuals in the RMD stage are typically receiving more in required distributions than they want or need. By donating to your favorite charity directly from an Individual Retirement Account, your required distribution and taxes are reduced under the QCD method. This is especially important for those unable to itemize their deductions, as now their charitable donations can be taken in full. If you are currently taking RMDs and making charitable donations, QCD’s can be a fantastic strategy.

Planning Tip:

Review your ongoing and upcoming charitable gifts and create a plan to do that in the most efficient way possible.

7. Tax Gain Harvesting

It’s been a heck of a good year for investors so far in 2021.

With only a maximum drawdown of 5.21% on the S&P 500 for the year (through 11/9) there hasn’t been much opportunity to harvest tax losses.

But tax gain harvesting is something to consider before year end. With tax gain harvesting, you’re selling appreciated securities and recognizing taxes in the current calendar year because you expect to be in a higher rate next year.

You may even be carrying forward banked losses from 2020 which can offset these gains further.

It’s also important to note that the long-term federal capital gains tax rate is 0% for single filers with taxable income less than $40,400 and $80,800 for those married filing jointly.

2021 Capital Gains Tax Rates

This strategy could include selling low basis stocks in your portfolio which either don’t fit in your plan anymore or aren’t expected to do well in the future. If you are having a low(er) income year in 2021 but expect a big tax year in 2022 (perhaps from business sale, bonus, or stock compensation), now may be the time to recognize gains on that position. You can then reallocate the proceeds to your diversified portfolio.

Gains from positions held less than one year are considered short-term capital gains and are taxed at ordinary income tax rates.

Planning Tip:

It’s impossible to correctly predict the direction of future tax rates. Gather all relevant projected income and tax information for the year and make the best decision you can with the information you have.

8. Roth Conversion

On the same note, if you are experiencing a low-income year, consider converting all or a portion of a Traditional IRA to a Roth IRA. Doing so means you’ll recognize income today on the amount converted, but withdrawals in the future will be tax-free.

The first $19,900 (for married filers) of ordinary income comes with a 10% federal tax rate. It’s only 12% up to $81,050. You may consider converting up to the first two brackets if your expected income in the future (earned income, Required Minimum Distributions, Pension, etc.) will be higher.

If you’re carrying a loss on your tax return, you could convert Traditional IRAs to Roth essentially tax-free as you eat into the loss.

It’s worth a discussion with your CPA and financial advisor.

Planning Tip:

Converting from Traditional to Roth is not an all or nothing proposition. You can make partial conversions and spread them out over several years.

9. Update Your Beneficiary Designations

The end of the year is a great time to make sure your beneficiaries are current. Log into your 401(k) plan, speak with your HR administrator, pull up your IRAs and life insurance policies, and request a review of your beneficiary designations to verify that they match your current wishes.

Life transitions, such as divorce or the death of a spouse, are incredibly difficult. It’s understandable that during these challenging times beneficiary designations are overlooked and left unchanged. This is your reminder to review them.

Planning Tip:

Whatever you have listed on a beneficiary form usually overrides what is written in your will or trust. A beneficiary form provides its own direction for the asset it covers so make sure it accurately reflects your wishes.

Now is an ideal time to review these 9 year-end planning tips and maybe just one of them will make a positive difference in your plan. Please reach out to us to talk through any of these planning opportunities in more detail.

Wishing you and yours a wonderful Thanksgiving!

Happy Planning,