Person using calculator

December 02, 2021

2021 Year-End Tax Planning: What You Need to Know

Tax season is still a few months away, but now is the time to make important decisions that can help manage your income tax liability for 2021. While it may be difficult, it's best to try and find some time to think about year-end tax planning amid the hustle and bustle of the holiday season. You will likely thank yourself in April, when 2021 tax season arrives.

“Many income tax-planning strategies need to be in place prior to Dec. 31st in order to have an affect on the amount of income taxes you'll need to pay in April," said Alan Wolberg, senior wealth planner at City National Bank. “Even though it's a busy time of year, it's important to sit down and think about how best to plan around taxes and act on that plan to help reduce your 2021 tax liability."

Wolberg suggested a number of potential tax strategies to consider, but noted that there is no set plan that works for everyone. It's a good idea to talk with your tax advisor or wealth planner to determine which strategies may work best for your particular goals and objectives.

Consider these seven strategies before you file your 2021 tax return.

Thank you for subscribing!
Error. This is not a valid email address. Please try again.
Error. Please make sure all fields are filled out and try again.
Subscribe to Our Newsletter

1. Contribute to tax-deductible or tax-deferred accounts.

If you have not maxed out your contributions to your employer-sponsored retirement plans and/or health savings accounts (HSA), you need to do so before the end of the calendar year in order to lower your taxable income for 2021.

Employees with regular 401(k) plans can contribute up to $19,500

($26,000 for employees over age 50), according to the IRS. Those with SIMPLE 401(k) plans can contribute up to $13,500, or $16,500 for taxpayers over age 50.

If you have a health insurance plan that qualifies you for an HSA, your contributions made to the plan by Dec. 31 are tax-deductible. Individuals can contribute up to $3,600, and those with family plans can contribute up to $7,200 for 2021.

Planning to make tax-deductible contributions to an IRA? You have more time for that. Individuals and couples can make 2021 tax-deductible contributions to Traditional IRAs, and contributions to SEP-IRAs and SIMPLE IRAs until April 15, 2022.

2. Consider a Roth conversion.

If you've considered converting all or part of a traditional IRA to a Roth

IRA, now might be the right time to do so. Funds that are held within a Roth IRA, may be distributed tax-free from the Roth IRA to you. In addition, Roth IRAs do not require the holder to take minimum distributions at a certain age, as is required with traditional IRAs.

Nobody knows what will happen in Congress this year, but if you expect that your tax rate may increase in 2022, a Roth conversion before the end of 2021 may save you money tax-wise. That's because when you convert a traditional IRA to a Roth IRA, you must pay income taxes due on the entire amount converted in the year converted. However, five years after the conversion is completed, “the Roth IRA will become a 100% tax-free investment," Wolberg said.

3. Wait to purchase mutual funds.

Planning to purchase mutual funds in 2021 that will be held in a taxable account? If so, it may be a good idea to wait for the new year to make the purchase. That's because when you own the mutual funds at the end of the year, you may receive a Form 1099 for year-end dividends and reinvested capital gains, even if you didn't own the fund when the dividends and capital gains were earned.

By waiting until Jan. 1 to purchase mutual funds, you'll start the new year with a clean slate and not be subject to taxes for earnings on assets that were not owned during the year.

4. Harvest capital losses.

Examine your portfolio for stocks that have a loss and consider selling them before the end of 2021. If you do, you can deduct losses up to $3,000 against ordinary income on your federal tax return. In addition, if you held the stock for more than one year before selling, you may instead deduct your 2021 capital losses dollar for dollar against your 2021 capital gains.

“For investors who have large capital gains in a given year, harvesting capital losses in that same year to help offset those gains is the first strategy they normally would discuss with their advisors when addressing year-end tax planning," Wolberg said.

5. Consider selling and rebuying stocks.

If you have stocks that have appreciated in value, think about selling them before the end of the year. Investors who are not in the highest tax brackets may have a capital gains tax rate of 15% rather than 20%.

Even if you want to continue owning the stock, you can balance the gains against any losses and repurchase the stocks after 30 days. Investors must wait at least 30 days to repurchase the stock to avoid the “wash sale" rules. This will reset your cost basis, helping to minimize the amount of tax on future gains.

“This strategy works well for those who have built-in capital losses," Wolberg says. “It is also a good way to rebalance a portfolio to lessen the risk that investors will lose money in the future."

6. Take advantage of charitable contribution rules.

The charitable income tax deduction is one of the few itemized deductions that is still available to taxpayers. The amount of charitable gifts you can claim as a charitable deduction depends on the type of asset gifted, your adjusted gross income (AGI) for that year and the type of charity that receives the gift.

The second CARES Act of 2020 entitled taxpayers to take a charitable deduction of up to 100% of their adjusted gross income for 2021 for cash gifts made to public charities. This benefit does not apply to cash gifts made to donor advised funds or community foundations. The ability to deduct up to 100% of your AGI is set to expire after 2021, so this may be a good year, depending on your financial situation, to be generous.

7. Make gifts to family members before the year's end.

For 2021, the IRS allows taxpayers to make gifts of up to $15,000 to any person without being subject to federal gift tax. For married couples, this annual exclusion from gift tax grows to $30,000 ($15,000 per spouse). If you plan to make gifts to family members, you will need to complete the gift before Dec. 31, 2021, in order to take advantage of the annual gift tax exclusion. If you do not use it, you lose it.

Before making any decisions about what to do with respect to your year-end tax planning, meet with your wealth planner and tax advisor. With potential new tax legislation being considered in Congress, your advisors can work with you to determine which moves might be the right ones for your particular situation.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances. Trust services are offered through City National Bank.

This article is for general information and education only. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader's specific investment objectives. Any financial instrument discussed in this article may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this article and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.

This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

Thank you for subscribing!
Error. This is not a valid email address. Please try again.
Error. Please make sure all fields are properly filled out and try again.
Subscribe to Our Newsletter