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10 Year-End Tax and Financial Planning Tips for 2021

Are you making a list and checking it twice this holiday season? This might not be the list you were thinking of, but it may help you financially.

  1. For those who do backdoor Roth IRAs, make your 2021 IRA contribution, and convert it by 12/31/21 in case that strategy is eliminated as proposed in the Build Back Better Act bill. Similarly, if you have an after-tax balance in a 401(k) plan that also offers a Roth account, convert the after-tax balance to the Roth account by 12/31/21 in case the BBB Act bill eliminates that opportunity. This would allow future earnings on the balance to grow tax-free in the Roth account.
  2. Spend your flexible spending account balance if it otherwise won’t carry over into next year. This doesn’t apply to a Health Savings Account (HSA) since that balance can accumulate and even be used for health care expenses in retirement (but save your receipts for unreimbursed expenses in case you need a distribution sooner).
  3. For those age 70.5 or older, consider making your charitable contributions up to $100,000 directly from your IRA to the charity through a Qualified Charitable Distribution (QCD). The distribution won’t count as taxable income and can satisfy your Required Minimum Distribution (RMD). This applies to inherited IRAs as well if you are at least age 70.5.
  4. Use a donor-advised fund (DAF) to funnel your charitable donations through to charities. The gift to the DAF counts as a charitable contribution for tax purposes, yet you can control when the charity gets the money – whether it’s now or in the future. This works well for “bunching” your charitable contributions to make your itemized deductions high enough to hurdle over the standard deduction in some years and take the high standard deduction in the off years. Usually, the total deductions over those years are higher by doing this. Some people accumulate money in their DAF so they can make a larger charitable grant, possibly something in their name. You can open a DAF through your local Community Foundation or at investment institutions such as Fidelity, Vanguard, Schwab, etc. Additionally, you can name a successor advisor to advise on the charitable grants if something happens to you. Have your children or grandchildren help you select the charities to receive grants. It’s a great way to involve the kids in charitable giving!
  5. Even if you don’t itemize, you can still deduct qualified charitable contribution up to $300 single or $600 for a married couple “above-the-line” for 2021 (gifts to a DAF aren’t eligible).
  6. Make your charitable gifts with appreciated stock. You get the charitable deduction for the full value as if you sold the stock and gave the proceeds, yet you never have to recognize the capital gain – a double tax savings of charitable deduction and capital gain avoidance. You can even give a larger gift of appreciated stock to your DAF and then sell it and use the proceeds to dole out the charitable grants in smaller amounts to various charities.
  7. Make your NYS 529 contribution of up to $5,000 per taxpayer by year-end to get the max NYS tax deduction, even if you need to withdraw it soon after for tuition.
  8. Reimburse yourself from your 529 plan by year-end for qualified education expenses incurred during the year. Distributions must be matched to the year expenses incurred by you or your child to be a qualified withdrawal (tax-free).
  9. Make annual exclusion gifts by year-end of up to $15,000 per donee ($30,000 per donee for a married couple who elect gift splitting or pay from a joint account). These add up over time for reducing your taxable estate and you can enjoy seeing them receive your gift during your lifetime. If they have earned income and haven’t already contributed, consider making an IRA or Roth IRA contribution on their behalf as your gift.
  10. Consider if a solo 401(k) plan is suitable for your small business and establish it by year-end. To qualify for this type of plan, your business can’t have other eligible employees besides you and your spouse. If your business is incorporated and it’s too late to make a deferral election, you can at least get a 2021 tax deduction for a profit-sharing contribution you make by the due date of the business’s 2021 tax return. If your business is unincorporated (i.e. sole proprietor, LLC, partnership), you can even make a deferral contribution in addition to a profit sharing contribution by the due date of your business’s tax return and deduct the total contribution on your 2021 tax return.

Hopefully these tips give you an idea of how to make the most of your finances. Be sure to take advantage of these opportunities before year-end!

If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.