This past week in our household we’ve started to think about financial moves we want to consider heading into the end of the year. With basically two months left of 2021, we have enough time to think about our financial options to consider before the year-end. It also gives us time to think about if there are year-end tax planning strategies that might be helpful, among other things.
So, this article will round up 5 year-end tax planning strategies that you may want to consider heading into 2022. There may be additional things to consider depending on your personal circumstances, so if you are uncertain about something talk with a tax professional.
1. Consider Selling Stock that is Currently at a Loss in Brokerage Accounts
Investment losses, if in a non-qualified account (i.e. a non-retirement account/not a 401k, 403b, or Individual Retirement Account), can be used to off-set investment gains or income. If you use losses to off-set income, there is a limit of $3,000 for this year that can be used to offset income from non-investment related income; however, you can carry additional losses forward to future years to offset income in future years.
So, if during 2021, you had capital gains on investments and if you have position(s) with a loss, especially large losses, it is worthwhile to at least consider capturing that loss to off-set income.
2. Make Retirement Account Contributions as one of your Year-End Tax Planning Strategies
There is a lot to unpack here with retirement account contributions, so please stick with me! Saving for retirement is critical, so I thought I would be remiss to not include this section! It’s not as clear-cut as some of the other sections within this article!
First, contributing to retirement accounts for the prior year can typically be done until tax day. So, as of now for 2021, tax day is April 15, 2022 (who knows if this date will move again like it did in 2020 and 2021!). So, you have a little flexibility on timing with respect to putting money towards retirement, as there is not a December 31, 2021, contribution deadline. However, if you do it after December 31, you need to ensure that your investment firm understands the contributions are for 2021, and not 2022 at the time you make the contributions.
The other thing I want to mention is that with the rise in popularity of Roth IRA’s and Roth 401ks, you don’t have a tax benefit for contributing to a Roth today. The term Roth means that after-tax funds are being placed into the account, so you’re still taxed on them this year. Therefore, there is no tax advantage for the year if funds are put into a Roth. However, maximum contribution limits are by year, so for a Roth IRA you have only through tax day 2022 to put $6,000 ($7,000 if you are over 50) into the account.
There are tax savings, though, for contributing to a Traditional IRA or a Traditional 401k, so if you use these types of accounts, contributing up to the limit to them through tax day 2022 can reduce your tax bill for the year. Reading this you may be thinking that I’m advocating to put money into a Traditional retirement account to reduce your tax bill this year; however, that’s not the case! There is a lot more to talk about, that it may need to be its own article some day. Just know that if your employer only offers a traditional 401k or if you only have a traditional IRA, contributing the max or as much as you can will lower your tax bill this year.
Whether you use a Roth account or a Traditional account to save for retirement, now is the perfect time to increase your contributions or make a plan as to how you can contribute additional funds for this year. Once tax day comes, no more can be added for 2021.
3. Max Out a Health Savings Account (HSA)
Health Savings Accounts (HSAs) are a tool to put money aside for medical expenses. From a tax perspective, all funds contributed to an HSA reduce your taxable income. Additionally, as long as the funds used from the HSA are used for qualifying medical expenses, no tax is charged on withdrawals from an HSA.
Like retirement accounts, there is a max as to how much can be contributed to a HSAs. The limits for 2021 are $3,650 for an individual, $7,300 for a family, and an additional $1,000 for individuals over the age of 55. Also, you officially have until tax day to contribute for the calendar year of 2021. This gives you additional flexibility on your contributions; however, again, now is the perfect time to make a plan to increase your contributions and max out or get as close to the contribution limit as possible, if you have a HSA.
4. Contribute to 529 Plans
529 Plans are an investment vehicle where you can put money to be used for education expenses. The benefit of a 529 Plan is that in some states, there is a state tax benefit for using one. I live in Missouri, so I’m going to use it as an example; however, each state is different. I’ll touch on that at the end of this section!
In Missouri, there is no limit on how much you can contribute to a 529 Plan; however, there is a limit to the deduction amount on contributions that can be claimed to save on state tax expense. For a single individual it is $8,000 or $16,000 if married filing jointly. So, if we contribute up to the max we can save on state tax.
The rules for 529 are under state laws, not federal, so there is a significant difference in how the programs are treated from a tax perspective. For a full listing and for details related to your state, here is a resource that breaks it down by state.
If there is the opportunity to save on tax within your state, and you or someone in your family (children or grandchildren) can use the funds for education expenses maxing out or increasing contributions to a 529 Plan now through the end of the year can be a smart year-end tax planning strategy!
5. Make a Cash Donation to a Charitable Organization as one of your Year-End Tax Planning Strategies
There is a long history with respect to charitable contributions and tax deductions (or not). However, the most current deduction was created with the enactment of the CARES Act in December 2020. For 2021, there is a deduction for charitable contributions that directly offsets income.
The limit is $300 for single individuals and $600 for couples married and filing jointly. The donations have to be made in a cash donation format (i.e. cash, check, mobile money transfer, etc.), so donations of goods (clothing or household items) do not count. If you want to lower your income in 2021, to pay a lower amount of taxes, giving to a charitable organization can help you do just that.
Dr. Thia would say that donating to a charity of your choice is also a way to increase your happiness, as giving to others contributes to your overall well-being. So, on-top of this being an option of one of your year-end tax planning strategies, it is also a smart move from a positive psychology perspective as well!
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