• Steve Coker, CFP

Year End Tax Planning


Once again, we must complete year-end tax planning with significant changes to the tax code looming before us. It is fair to assume that tax rates will be higher in 2022, but it is difficult to assess exactly who will be impacted, and what tax changes will be signed into law. Despite the uncertainty, it is always worth assessing your situation and taking steps to optimize your 2021 tax situation. Here are a few items to consider regardless of what happens to taxes in 2022.


What should you do if your 2021 income is higher than normal?

Pay has been rising, and many are experiencing higher than usual capital gain income as stock market gains are realized. In addition, many business owners are experiencing record profits. If you fall into one of these categories, then here are some ideas for reducing your taxable income and advancing deductions:


1. Maximize your 401k deduction or contribute to a SEP-IRA. This is one of the first and best ways to reduce taxable income. The maximum 401k contribution for 2021 is $19,500 for those under 50 and $26,000 for those 50 and older. Increasing those contributions for the remainder of the year can significantly reduce your taxes due. If you are self-employed then consider starting a SEP-IRA, which generally allow you to contribute up to the lesser of $58,000 or 25% of your self-employment income (check with your tax advisor).


2. Donate appreciated stock: Stocks have risen considerably over the past two years. If you are charitably minded, then one of the best ways to reduce taxes is to give. And one of the best ways to give is to donate appreciated stock. If you don’t where to give you can contribute to a Donor Advised Fund, get the tax deduction this year, and then select the final charities in the years to come. This strategy is especially effective when you have a one-time spike in income.


What should you do if your 2021 income is lower than normal?

Did you get laid-off, retire to a much lower income, or have a loss this year? Make the most of your lower tax bracket by considering the following:


1. Convert some of your traditional IRA to a ROTH IRA. Converting part of your traditional IRA to a ROTH IRA requires that you pay taxes on the converted amount. What better time to make the conversion than in a year with lower income? Paying a small amount of tax now can save you thousands in the long run.


2. Harvest capital gains. Many investors have unrealized gains from the recovery over the past two years. Harvesting these capital gains can make sense in many situations but can be especially helpful when your income is lower than normal. In fact, the long-term capital gains rate for Federal taxes is 0% for those in the 10% and 15% brackets (up to $80,800 in taxable income for 2021 for a married filing jointly taxpayer and $40,400 for a taxpayer filing single).


There are many other strategies to help your tax situation, but these investment related tips can help optimize your tax situation.

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