Tax Planning 2021 – Individuals

As year-end approaches, it is a great time to think about planning moves that may help lower your tax bill for this year.

There is a strong possibility that we will see significant changes to our tax laws effective 2021 and/or 2022. The Biden Administration proposed a variety of tax changes which are still in the negotiation process making it difficult to predict which of these proposals will become law. However, it is probable that some changes will be made. 

Amid uncertainty about proposed tax increases, these are the tax moves to consider before the end of the year.

• For 2021, taxpayers who don’t itemize can take advantage of $300 above-the-line deduction for cash contributions to qualified charitable organizations ($600 for married filing jointly).  Taxpayers taking Required Minimum Distributions (RMD’s) can also consider paying charitable contributions directly from their IRA.
• If you were in a federally declared disaster area such as Hurricane Ida and you suffered uninsured or unreimbursed disaster-related losses, you can choose to claim them on the tax return for the year the loss occurred or the preceding tax year.
• Carefully manage gains and losses in investment accounts. To the extent you have capital losses this year or capital loss carryovers from earlier years, selling appreciated securities by year-end may not increase your taxes.  Offsetting net short-term capital gains with capital losses is a tax-efficient move because net short-terms gains will be taxed at your higher ordinary income rate of up to 37% plus another 3.8% for the net investment income tax. 

If your total itemizable deductions for this year will be close to your standard deduction allowance, consider making enough additional expenditures for itemized deduction items before year-end to exceed the standard deduction. 

WM Wisdom: 
Taxpayers who are concerned with proposed Long-Term Capital Gain rate increases may wish to trigger additional gains during 2021 before the higher tax rates take effect.

WM Wisdom: 
The easiest deductible expense to prepay is a mortgage payment due on January 1, 2022. Accelerating that payment into this year will give you 13 months’ worth of itemized home mortgage interest deductions in 2021.

• To take advantage of various tax credits such as the Child Tax Credits or Child and Dependent Care Credits, consider postponing income until 2022 and accelerate deductions into 2021. If you are working with an organization that provides a retirement plan, review the plan documentation, and determine if you can make additional contributions to the plan or increase your deferral for 2022.
• Qualified Medical Expenses – Personal protective equipment (PPE) purchased to prevent the spread of COVID-19 qualifies as a medical expense that may be deductible as an itemized deduction.  In addition, items such as masks and hand sanitizer are now eligible to be paid, or reimbursed, under medical expense accounts such as FSAs, HRAs, HSAs, and MSAs. If a medical expense account is not used and the items are not reimbursed by insurance, the costs can be included as a medical expense.

With the federal income tax increase proposals floating around, tax planning will be crucial this year. We will continue to monitor future developments and keep you updated with the latest tax law changes. 

Questions?

Should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time. 

DISCLAIMER: The WM Daily Update COVID-19, COVID-19 Business Resources, and COVID-19 Client News Alerts and other related communications are intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.