September 2021
College and Tax Planning

Why put off until December, what you can do today? As we approach mid-year, it’s never too early to consider planning strategies for the year that may help lower your tax bill. Review the below list to see if there are steps you can take now to reduce your 2021 tax bill.

Review your latest paystub and Maximize your 401(k) deferral

Make sure you are on track so that your 401(k) contributions will be maxed out by year end. The 2021 contribution limit is $19,500, with an additional $6,500 catch-up contribution if you are 50 or older. If you turn 50 during 2021, make sure your payroll department is allowing for the additional contributions. Also consider whether contributions to a ROTH 401(k) would be more beneficial. This would cause your current contribution to be after tax (resulting in higher, not lower) taxes. As such, we suggest that you consult with your financial advisor before making such a change to see how this strategy may help over the long term.

Health Savings Account

Make sure you are on track to maximize your HSA contributions by year end. The 2021 maximum contribution is $3,600 for individual plans and $7,200 for family plans. If you are 55 or older, you can contribute an additional $1,000 catch-up contribution. If possible, try not to spend the dollars saved in the HSA account as this account can be used like another tax deferred retirement account and provide for future tax free withdrawals.

Plan for IRA Distributions

The CARES Act waived Required Minimum Distribution (RMD) requirements for 2020 only. So, be sure to take your 2021 RMD before year end, including required distributions from inherited IRAs.  If you are over 70 1/2, consider making Qualified Charitable Distributions from your IRA directly to public charities to satisfy your RMD requirements (up to $100,000 per taxpayer). Reminder to review the RMD age requirements as the SECURE Act (passed in December 2019) increased the RMD age to 72 for those not already required to take RMDs in 2019 as a result of reaching age 70 1/2.

Real Estate Sales

The real estate market is hot! Which means many sellers will be realizing large gains on the sale of their homes. Remember, if you sell your home, and it has been your primary residence for two of the last five years, single filers can exclude gains up to $250,000 and joint filers up to $500,000. So, it is very important to keep detailed records to support your tax basis in the home. This would include purchase documents, detailed listing of capital improvements (and receipts) as well as all selling expenses.

Plan for Charitable Contributions

In 2021, taxpayers who take the standard deduction are also able to deduct up to $300 of cash charitable contributions ($600 for a joint return). And, similar to 2020, taxpayers can deduct cash charitable contributions in tax year 2021 up to 100% of their adjusted gross income. Please note the 100% limitation does not apply to cash donations made to donor advised funds or private foundations. Taxpayers should also still consider bunching charitable gifts to get the benefit of itemizing in one year and taking the standard deduction in another and/or donating appreciated stock rather than cash.

Tax Credits - Consider federal and state tax credits available to you to offset your taxes

Residential Energy Credits (federal credit) – Good news for those taxpayers who have been contemplating installing solar panels or geothermal heat pumps – In December 2020, Congress extended the tax credit for cost of installation of solar electric property as well as geothermal heat pumps, previously set to expire at the end of 2021. For certain energy efficient property placed in service from 2021-2022, taxpayers can take a 26% tax credit and for property placed in service from 2022-2024, taxpayers can take a 24% tax credit. The credit is set to expire at the end of 2024, unless Congress acts to extend the credit again.

There are many different strategies to help reduce current income tax. The specific categories of your income (capital or investment income vs ordinary) can have a major impact as well as consideration of future income and long-term goals. If you have any questions about the above information or are not sure if certain items apply to your tax situation, give us a call at the office!

If you have questions, please contact us.

MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION
GRAPHIC OFTHE MONTH

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