28 Sep 2021 Save Taxes Next Year, Regardless of What Happens in Congress
Year-end tax planning may help you save taxes, regardless of what happens in Congress
Many popular tax-planning strategies are in question as Congress debates how to pay for their $3.5 trillion spending package. However, now is the time to consider year-end moves to lower next year’s tax bill, regardless of what happens in Congress.
Year-end tax planning should be done every year, regardless of pending changes. While it may be difficult to predict how tax law changes will shake out, here are some strategies to consider as the year winds down.
Recognize investment losses to offset gains
Taxpayers may consider tax-loss harvesting, which allows them to offset capital gains with losses. Investors may be able to deduct up to $3,000 more losses than gains, against their regular income. The balance of any unused losses carry forward to the following year. Review your investment holdings to see if there are losses that can be recognized to offset other gains that have been or may be recognized before year-end.
However, be aware of the wash-sale rules. If you sell an investment for a loss and within 30 days buy back “substantially identical” investments, you will be prevented from deducting the loss. Currently, wash-sale rules don’t apply to cryptocurrency. But Congress is looking at changing that as soon as Dec. 31.
Roth IRA Conversions
You may want to consider a Roth conversion before year-end. A Roth conversion allows someone to convert funds in pre-tax individual retirement account or 401(k) to an after-tax Roth IRA. The amount converted will be recognized as taxable income in the year of conversion, but the Roth IRA provides tax-free future growth if all conditions are met.
There has been talk in Congress to restrict a Roth conversion for those making more than $400,000 per year ($450,000 for married couples filing jointly). This is an area you will want to watch closely.
You may want to consider charitable gifts prior to year-end. With a $12,550 standard deduction for single filers ($25,100 for couples filing together) in 2021, it may be the standard deduction is greater than your combined allowed itemized deductions. You may want to consider combining multiple years of donations, known as “bunching,” to clear the standard deduction thresholds. So, in alternating years you itemize vs taking the standard deduction.
Retirees age 70½ and older may consider a so-called Qualified Charitable Distribution [QCD], a direct payment from pre-tax IRAs, which doesn’t count as taxable income. Someone age 72 and older may use the QCD to help satisfy their annual Required Minimum Distribution [RMD]. QCDs are not counted as income and therefore can affect other items that are linked to Adjusted Gross Income [AGI].
While there are other tax moves to consider, you will want to monitor plans from Congress and waiting for the final legislation before pulling the trigger on some of the year-end plans. It is difficult at this point to know which way the wind will blow in Congress.
Higher income and capital gains taxes, as well as changes to the estate and gift taxes are being considered.
Please contact us if you want to explore any of these options further.
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