6 Tax-Claiming Strategies to Utilize in 2021

6 Tax-Claiming Strategies to Utilize in 2021 - Marshall Financial Group

Each year tax planning ideally begins on January 1. However, there are tax-claiming strategies that remain available even in the final quarter of the year. Here are six areas to review that may provide potential tax savings in 2021.

Think about your charitable contributions.

If you take the standard deduction in 2021, you are also able to deduct up to $300 of cash charitable contributions ($600 for a joint return). Taxpayers that itemize deductions can deduct cash charitable contributions in tax years 2020 and 2021 up to 100% of their adjusted gross income. This change was included as part of the CARES Act (link: https://home.treasury.gov/policy-issues/coronavirus/about-the-cares-act) and applies only to 2020 and 2021 tax years. Please note the 100% limitation does not apply to cash donations made to donor advised funds or private foundations.

You should also take into consideration bunching charitable gifts. This provides you with the benefit of itemizing in one year and taking the standard deduction in another and/or donating appreciated stock rather than cash. If you are charitably inclined, consider reviewing this potential strategy with your tax advisor.

Plan for IRA Distributions

The CARES Act waived Required Minimum Distribution (RMD) requirements for 2020. However, the requirement returned for 2021 and beyond. 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 ½. If a distribution is required, it is imperative that you take 2021 RMDs prior to December 31, 2021.  This annual requirement also applies to distributions from inherited IRAs.

If you are required to take a minimum distribution from your IRA and do not choose to use the funds for current expenditures, you could consider several alternatives. You could transfer the after-tax distribution to a nonqualified investment account to provide future growth in your portfolio. You could also consider making Qualified Charitable Distributions from your IRA directly to public charities to satisfy your RMD requirements (up to $100,000 per taxpayer). Our advisors are available to review the options available to you so that you can best align your decision with your personal goals.

Check in on your Health Savings Account.

Health Savings Accounts (HSAs) can provide a way to reduce both your current tax liability and provide for future tax-free withdrawals. If you are eligible for an HSA, consider maximizing your contribution for 2021 up to the annual limit of $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.

Consider your investment portfolio strategy.

Portfolios that includestocks, mutual funds or ETFs that experience losses can be used to offset taxable gains for the year. As your investment advisors, we monitor the markets and harvest tax losses to strategically offset capital gains when these actions align with your investment strategy. The offsets of gains are allowed on a dollar-for-dollar basis. If your losses exceed your gains for the year, you also have the ability to use up to $3,000 in losses to offset other income. Additional losses can be carried over year after year. It is important to consider the implications of the Wash-Sale Rule which could negate a tax loss deduction if the security sold at a loss is repurchased within 30 days of loss harvesting.

For 2021, you and your financial advisor can also consider if it is appropriate to take gains given strong market performance to date and the possibility of higher capital gain tax rates in the future. Plan to review your current tax bracket with your tax advisor to determine if the potential exists to recognize long term capital gains at a preferential rate. For joint filers with taxable income up to $80,000 (including the gains to be recognized), the capital gains rate is 0%. Joint filers with total taxable income between $80,000 and $496,600 are currently subject to a long term capital gains tax rate of 15%. For a portfolio with large embedded gains, “filling” a bracket of income that allows for substantial savings on the taxability of gains can prove to be an effective strategy.

Think about real estate sales.

Real estate values have increased in most areas this year. Many sellers will be realizing large gains on the sale of their homes. If you sold your home in 2021 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. 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.

Monitor business income and deductions.

While no one can predict the future, there exists the possibility that tax rates will be increasing next year. If we do see an increase in tax rates for 2022, consideration could be given to accelerating income into 2021 and deferring deductions to 2022. It is important to review the status of these changes with your tax advisor as more detailed legislation is introduced in the coming weeks and months.

As we approach the end of the year, make sure to contact your financial advisor so that you understand the tax implications of your 2021 financial decisions. It’s also never too early to start planning for 2022.

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