Year-End Tax and Financial Planning Ideas – Build Back Better Edition

Note:  At the time of authoring this article, the final legislation under the Build Back Better Act has not become law and is still undergoing debate in congress. 

2021 has again proven to be another year of uncertainty regarding tax legislation.  For many professionals, it has been nearly impossible to provide any concrete advisory direction without knowing what the result of the Build Back America Act, also known as the reconciliation bill, will include.  However, even though there is a level of uncertainty, many professionals, including us, believe that whatever bill does hit Biden’s desk for signature, it will most likely include changes that raise tax revenue to pay for the American Rescue Plan Act of 2021 passed in March of 2021 and the Infrastructure Investment and Jobs Act passed in November of 2021.  Both bills have increased our national deficit by trillions of dollars.

Before you start thinking about 2022, do not forget about your 2021 year-end tax and financial planning because there are still opportunities under current law to consider, at least from a planning perspective, to take advantage of before year-end.  

Below is a list of ideas that you should consider before year-end:

1. Do you invest in Crypto currency?  Under the infrastructure bill that passed in November of 2021, all digital currencies are now classified as specified securities and will be subject to the same reporting by brokers providing services for digital assets.  Reporting will be required after January 1, 2023, and security wash sale rules will be in effect starting in 2022.  Therefore, it is recommended to realize and harvest losses before 2022.    
2. Have taxable capital gains in 2021?  Look at Qualified Opportunity Zone investments that could defer your gains and even eliminate some of your gain.  Not all opportunity zone investments are the same.  Make sure the investment is appropriate before investing.
3. Don’t forget to tax loss harvest before year end by selling securities at a loss to offset any tax gains you realized in 2021.
4. If you took COVID-19 pandemic related penalty free distributions from your retirement accounts under the CARES Act and elected to pay back the distribution over 3 years, you may want to pay back your distribution to avoid potential higher taxes in future years. 
5. Back-Door Roth contributions for those who can’t make direct contributions to Roth IRAs are going away.  If you haven’t already, make your contribution and conversion before the end of the year.
6. By now we are all familiar with the $10,000 / year state and local tax deduction limits for itemized deductions.  The current proposed legislation is looking to increase the SALT limitations in 2022 so it is recommended to delay paying property taxes until 2022 and use ‘bunching” techniques to increase your itemized deductions in 2022. 
7. Now is the time review and update your Estate Plan to maximize your use of your Estate Tax Exemption.  With low interest rates and low business valuations, you could potentially give more of or make better use of expanded Lifetime Gift Exemption which is currently $11.7 Million per taxpayer.  Doing so can lower or maybe eliminate your projected estate tax obligation.  Prior versions of the Build Back Better Plan included dramatic changes to the estate tax regime, however, they did not survive negotiations.    Prior law is still in effect.  Act now to avoid any potential future legislation that would try to eliminate many of the tools and strategies available today.
8. Do you have unused Flex Spending Accounts in 2021?  They can be carried forward to 2022.  Verify with your employer. 
9. If you give to charity, but do not have enough to itemize or you are still thinking about giving to charity, there is a $300/$600 above-the-line deduction for single/joint tax filers for 2021.  Contributions must be to 501(c)(3)s and must be cash. 
10. Working from home?  Many folks were forced to work from home because of COVID-19.  Don’t forget to keep track of home office expenses for your 2021 tax return.
11. Consider accelerating income into 2021 and deferring expenses to 2022.  Tax rates are likely to go up in 2022.  If you purchased depreciable assets in 2021, think long and hard about NOT taking any accelerated deprecation in 2021 and elect to take standard MACRS deprecation to push your expenses into future years.  Have a business that is cash basis?  Deposit your receipts before year end and delay payments on expenses until 2022.  Income acceleration may also include Roth IRA conversions.
12. Don’t forget to take your 2021 Required Minimum Distributions (RMDs). 

The end of the year presents a unique opportunity to self-reflect about your personal financial planning situation. With factors like tax law changes, life changes, or simply working towards your goals, now is an especially important time to review things. It is always a good time to see if you are on track at your stage in life. Taking what we now know about the proposed legislation, the Build Back Better Act, and weaving together all of the other areas of your personal finances is one of the key ways we provide value to you as your trusted advisor. Below are some things we would like to help you think through before the year ends.

Income Tax Planning: Make sure you are implementing tax reduction strategies such as maximizing your retirement plan contributions, HSA contributions, FSA distributions, ROTH conversions, tax-loss harvesting your portfolios, making smart tax-efficient charitable contributions, and understanding all the new tax benefits, can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from previous years. We talk about many of these in our year-end tax planning checklist.

Estate Planning: Examine a flowchart of your current estate plan to visualize what would happen to your assets and how the current estate tax law will impact you. For some taxpayers with large taxable estates, the time is now to review your estate plan to maximize the increased estate tax exemption set to expire in 2026!  You want to be sure that your estate planning documents are up to date. In addition to your will, it is important to review your power of attorney, health care documents, trust agreements, and beneficiary designations to assure they all coordinate together according to your desired estate distribution. If you have recently been through a significant life event such as marriage, divorce, or the death of a spouse, this is especially important right now.

Investment Planning: Recently, we have seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing and understanding the importance of maintaining your investment discipline during these times is vital. We have always suggested that it is important to “Stress Test” your portfolio to see how it would respond if, for example, there were to be a recession.  We talk about how to navigate recessions in our Recession Survival Guide.  Review your Portfolio Allocation to reaffirm that your current investment allocation and discipline are aligned with your financial plan. Regular portfolio rebalancing and reviews will keep the appropriate amount of risk-balanced in your portfolio. If you are retired and living off your portfolio assets, you need to maintain an appropriate cash reserve to cover expenses.  You do not want to be forced to sell equities in a down market. Check out our Retirement Survival Guide where we discuss this in more detail. It is also a good idea to look at expected distributions from mutual funds. If you recently purchased a mutual fund (or have a fund with a holding-period loss or small gain), you can check with the fund company to see if there will be a large capital gain distribution that will be taxable. If you sell the fund before the distribution, you can avoid the tax hit.  TIP: These occur annually – typically in December.

Charitable Giving: There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock would allow for a full deduction of the value and avoid paying capital gains taxes. Maybe you have some high concentrated stock positions with a low-cost basis.  These securities are excellent candidates for charitable contributions.  Plus, you can always buy back the stock if you really insist on owning it.  Another great option is to make direct gifts to charities from your retirement accounts if you are over age 70 ½ known as Qualified Charitable Distributions (QCD).  Doing so will not add income to your return AND qualify towards your required minimum distributions for the year.  You may also want to consider bunching charitable deductions by deferring donations to next year or making your planned donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor-advised fund for your charitable giving. These contributions need to be locked in by year-end to get a deduction, so now is a great time to start considering your plan.  For more advanced charitable giving, consider Charitable Remainder Trusts that can provide a stream of income while you are alive, but leave the remainder to charity.

Retirement Planning: Think about your future when working becomes optional. Whether you expect a typical full-retirement or maybe a career change to something different, determining an appropriate balance between spending and saving for now and the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you. We have a great Retirement Planning Checklist for you to see if you are on track!

Cash Flow Planning: Review your annual spending and plan for next year. Understanding your cash flow needs is an important aspect of determining if you have enough assets to meet your goals. If you are retired, it is particularly important to maintain a tax-efficient, safe, and sustainable withdrawal strategy to cover your spending needs.  This is addressed in our Retirement Survival Guide and described in Planning for Retirement the R.I.T.E. Way®  (R.I.T.E. stands for “Retirement Income Taxed Efficiently” – see the image in the link from the guide). If you have not yet reached age 70 ½, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70 ½ make sure you are taking your required minimum distributions.  Otherwise, the penalties are significant if – up to 50%! This may also include reviewing strategies to maximize income from Social Security and Pensions.

Risk Management: It is always a good idea to periodically review all your insurance coverages. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property and casualty insurance coverage is available when you need it. If you are in a Federal disaster area, there are additional steps to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life, long-term care, and/or disability insurance.  There are both term and permanent options are available for life insurance and under certain situations, some policies may even help you save tax-deferred for retirement.

Education Funding: Funding education costs for children or grandchildren is important to many families. While the increase in college costs has slowed some lately, this is still a major expense for most families. It is important to know all the options available to save for education to determine the optimal strategy. Funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous. For those with kids in college, it is also important to understand the rules when it comes to taking 529 Plan withdrawals tax-free.  Don’t forget to submit your reimbursements prior to year-end. 

Elder Planning: There are many financial planning elements to consider as you age, and it is important to consider these things before it is too late. Consider planning for incapacity. There are many issues to consider when caring for your aging parents or other loved ones.  Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understand your plans will help reduce family conflicts and have your wishes considered.

Business Planning: If you own a business, you should especially be paying close attention to your year-end.  Why?  Congress is constantly making tax law changes that impact many businesses and the tax they or their owners pay.  A new tax code section for businesses, 199A, gives business owners who are structured as an S Corp, Partnership, Single Member LLC, or Sole Proprietor the benefit of deducting an additional 20% for the net income of their taxes!  For many, this can be a huge saving.  The rules are very complicated and require that you plan at year-end to maximize your potential deduction.  The new tax law includes two new changes that limit the amount of interest you may be able to deduct and no longer allow net operating losses to be carried back to prior years. You can only carry them forward with a limit of what you can deduct in any year.  Also, if you are looking to start giving your employees more benefits and are considering setting up a qualified retirement plan, some options are required to be in place before the following calendar year depending on which plan is right for you. Whether it is a 401K, SEP IRA, Defined Benefit Plan, or Simple IRA plan, we can help you determine which plan is right for your business.

Conclusion: In addition to the ideas above, last year we updated our Top 10 Tax Planning Ideas for 2019-20, and this year, we talked about the 10 most asked tax questions in 2021.  The decisions you make each year with your personal finances will have a lasting impact on your long-term financial plan. Do not leave tax benefits behind.  Do not miss out on savings today.  If you don’t have a financial plan, here is a short video that shares Avidian Wealth’s Financial Planning Process. We hope this letter has begun to generate some insight into areas of your personal finance that need attention. Please contact us when you are ready to talk through year-end planning.

---

Please read important disclosures here