8 Year-End Tax Planning Tips

* This article was originally published on November 21, 2018. It has been updated for 2021.

For many, tax season is a looming enigma. And that may be especially true for this 2021 tax year due to multiple pandemic-related tax law changes — and the planning opportunities they can bring.

Come tax time next year, will you have to pay in? Will you be getting a refund? How much? Could either outcome affect your daily life or how quickly you could achieve that next big life goal?

With a little planning — or requesting a year-end tax projection from our team — your 2021 taxes don’t have to be shrouded in mystery.

What is tax planning, you ask? It’s a periodic check-in on your tax situation that allows you opportunities to review your income, plan for open enrollment, and tweak your investments to make the most of your money. It’s a view of what you can expect in terms of taxes for the year that gives you time to adjust your finances to better meet your needs.

Now that we’re in the fourth quarter of 2021, isn’t it time you did a little end-of-year tax planning of your own? Here’s where you can start.

Year-end tax planning 101

Send your most recent pay stub our way. We’ll review your gross — aka before-tax — earnings and total withholdings, then extrapolate them to project your annual income for 2021. We’ll then use this analysis to help you plan for tax season and let you know if you’re on track to receive a refund or likely to end up with a balance due. 

Together, we’ll strike the right balance with your remaining paychecks for the year by adjusting your withholding, working to stay within $1,000 on either side of zero come tax time. Here’s why: If you’re set to receive a large refund, you’ve been giving Uncle Sam a big interest-free loan; if it looks like you’ll owe quite a bit in taxes because of too-low withholding throughout the year, you’ll owe Uncle Sam money — and possibly a penalty, too. Tax planning can help you get to the side you want to be on without reaching either extreme.

If the W-4 we create for you to provide to your HR team won’t do the trick, we can help you create a savings plan to prepare for a balance due. After we’ve reviewed your pay stub and you’ve submitted that W-4 to adjust your withholding, if necessary, it’s time to dig into your basics and benefits. You can follow this list in order, skipping over the items that don’t apply to you and digging deeper into those that affect you more.

1. Will you itemize or take a standard deduction? It’s important you understand the increased standard deduction amounts as you evaluate your numbers and consider whether you can itemize. Could you fare better with a standard deduction for this year? 

The standard deduction for 2021 is $12,550 for individuals or $25,100 for married couples filing jointly. Based on these numbers, it might not only be easier but also more financially beneficial to take a standard deduction, even if you’ve itemized in the past. And you don’t have to make this decision alone. We’ll help you figure it out as part of your tax projection.

2. Share the love. Individuals claiming the standard deduction can write off up to $300 of charitable cash contributions “above the line” in 2021. For couples who file as married filing jointly, double that amount to $600.

For itemizers, there’s normally a 60% of Adjusted Gross Income (AGI) limit on deductions for cash charitable donations. The CARES Act made it so you can deduct 100% of your AGI for 2021 for cash donations to qualifying charities (donor-advised funds and private nonprofit foundations are excluded).

In plain English, if you had income over $300 if filing single or $600 if married filing jointly, you can donate that amount to the charity of your choice this year — and exclude it from your income at tax time. This means that $300 or $600 disappears from your income as if you never earned it. So you’re not taxed on it, and you’ve benefited a charity. Win-win! Just make sure that your charity of choice is on the IRS’s tax-exempt list, so you’re eligible for the deduction.

3. Harvest your losses. Ever heard of tax-loss harvesting? Picture this: You have a loss on an investment (a lemon), so you sell that investment and reinvest the funds into something else. Now you have a capital loss that you can use to offset capital gains or up to $3,000 of ordinary income (lemonade!). At the same time, assuming your replacement investment is similar — but not identical — to the investment you sold, your portfolio should still be invested appropriately.

It can all add up to tax savings, so review your taxable investment accounts toward the end of 2021, and consider whether you can harvest any tax loss lemons. Be careful that you do not buy an identical investment — in any account you own — 30 days before or after the date you sell an investment for tax-loss harvesting. Or, if you don’t already, let us take investment management off your plate. It’s included in your comprehensive services package, and we’ll also take care of tax-loss harvesting for you.

4. Double your money. If you haven’t contributed enough to your workplace retirement plan to receive your employer’s full dollar-for-dollar match yet, now’s the time. It’s usually up to a certain percentage of your gross income, so focus on contributing as much as possible at least up to that amount. Invest more if you can to get more of your dollars into your retirement account and out of your taxable income. Why now? You likely still have a few paychecks coming through before the end of the year, and the “free money” match expires — and restarts for 2022 — when the clock strikes midnight on New Year’s Eve.

5. Minimum distributions are back for 2021. Do you have a Beneficiary IRA or will you be 72 or older by the end of the year and have your own IRA? If so, you need to take your required minimum distribution (RMD) from that IRA for 2021 before the end of the year. Exceptions are limited, and if you don’t, you’ll owe a penalty equal to 50% of what your RMD should have been. Ouch! 

Want to know what your RMD is for this year? Just ask!

6. Give it away. You can gift up to $15,000 to any individual gift-tax-free until Dec. 31, 2021, and without having to file a gift tax return. While couples who choose to double that amount to $30,000 will have to file a gift tax return if taking advantage of gift-splitting, we’ll take care of filing Form 709 for you as it’s also part of your comprehensive services package. Want to give more? You could gift plenty more without paying any gift tax, but you’d have to file a gift tax return if you give anyone over $15,000 — and you’d be using up some of your lifetime gift and estate tax exemption, so gift wisely.

One legal loophole: You can “gift ahead” in a 529 college savings plan without having to file a federal gift tax return. It’s the equivalent of five years of gifting, meaning you can invest up to $75,000 per beneficiary without using any of your lifetime gift and estate tax exemption.

7. Head to the backdoor before it potentially closes. That’s right: The backdoor Roth may soon be a thing of the past. So take advantage of tax-advantaged savings just in case you don’t have the opportunity in the future. 

8. Track your advance child tax credit payments. For eligible parents of children under age 6 receiving payments of up to $300 per month per child and those with children age 6 through 17 receiving up to $250 per month per child, it’s time to get tracking! These payments began landing in checking and savings accounts in July via direct deposit. So grab your banking app, search for “CHILDCTC” in the appropriate account, and take a screenshot! You’ll thank yourself come tax time. 

Not all parents are eligible as these payments are phased out at certain income levels. Those above the phaseouts who have received payments will have to repay all or a portion of their advance child tax credits when they file their 2021 taxes. If you’ve been receiving payments and want to check your eligibility, feel free to reach out. 

Bonus tip: With year-end coming up and tax season only a few months away, it’s also time to check in on your emergency/opportunity fund. This subset of savings can help in the event you receive an unexpectedly hefty tax bill, allowing you to stay on track to reach your short- and long-term goals.

Simple Tax To-Dos

Clearly, there’s a lot to consider when it comes time for year-end tax planning, and it can be a lot to think about and do — especially if you wait. So grab that last pay stub, see what your tax situation looks like compared to your expectations, and make any year-end adjustments necessary to keep you on track today. 

Making good tax decisions now can also set you up for success in the year to come, so consider how the changes you make today could affect you in 2022. You may want to keep a few other tax-planning considerations in mind as their deadlines extend beyond the end of the calendar year, like: 

• investing in your health savings account, 
• adding funds to your traditional or Roth IRA, and 
• contributing the right amount to — and using the funds in — your flexible spending account (FSA). 

You have until Tax Day 2022 to make an IRA or Roth IRA contribution for tax year 2021, and you can invest up to $6,000 in your IRA — or $7,000 if you’re 50 or older. And although you can’t change your regular FSA contributions until your employer’s next open enrollment period, you may be able to invest in your health savings account (HSA) outside of payroll to provide yourself with additional tax-advantaged savings. Also, while you may be able to carry over $500 in your FSA in some plans, be sure to spend or withdraw the appropriate funds by the last day of your benefits year to avoid forfeiting all or a portion of it.

After you’ve completed your year-end tax planning, do yourself — and your finances — a favor by setting a reminder on your calendar for your next tax-planning check-in. Better yet, make it easy and delegate it to us! 

Don’t forget: Tax Day is April 15, 2022.