Year-End Tax Planning and Tips

Looking to year-end

Time is short and the holidays are always hectic, but consider carving out some time for year-end financial matters.

A number of questions about proposed changes in the tax code have come my way. As the Build Back Better Act winds its way through Congress, early proposals have fallen by the wayside and it likely won’t pass before the end of the year.

Changes in individual income tax rates, increases in rates for long-term capital gains, and updates to estate taxes are unlikely to be enacted into law.

But we may see a big increase in the cap for state and local tax (SALT) deductions, and a surtax for those with very high incomes may land in the tax code. As currently proposed, a 5% surtax would apply to individuals with income over $10 million, increasing 3% above $25 million.

There is also bipartisan support for updates to retirement rules—what’s being called SECURE Act 2.0. Recently, however, the legislation has lost momentum, as Congress deals with tight deadlines on taxes and new spending.

But let’s not jump too far into the future. Perhaps the SECURE Act 2.0 will pass next year. Comprehensive bills don’t pass quickly, even if support is bipartisan. Instead, let’s focus on tying up loose ends as the year comes to a close.

Before we jump into our year-end planning piece, I want to stress to you that it’s my job to partner with you. I can’t overemphasize this, and I would be happy to review your options.

8 end-of-year tax facts and tips to save you money

  1. Tax brackets have changed. Every year, the tax brackets for taxable income are adjusted based on the rate of inflation. Table 1 illustrates the marginal tax bracket based on taxable income. This is income after all deductions.

Table 1: Tax Brackets for 2021

RateFor Single IndividualsFor Married Individuals Filing Joint ReturnsFor Heads of Households
10%Up to $9,950Up to $19,900Up to $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 or more$628,301 or more$523,601 or more
Source: [[https://taxfoundation.org/2021-tax-brackets/ Tax Foundation]]
  1. Standard deduction rises for tax year 2021. The standard deduction for married couples filing jointly for tax year 2021 rises to $25,100, up $300 from the prior year.

    For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150. For heads of households, the standard deduction will be $18,800 for tax year 2021, up $150. (IRS provides tax inflation adjustments for tax year 2021.)
  1. Child Tax Credit has changed. Each qualifying household is eligible to receive up to $3,600 for each child under 6, and $3,000 for each child between 6 and 17. You may receive half of the new credit between July and December 2021 and the remaining half in 2022, when you file a tax return.

    Even if you don’t owe any federal taxes, you may still be eligible for the credit. If you have no income, you may still receive the credit.

    The credit gradually declines starting at income of $75,000 for individuals, $150,000 for married couples, and $112,500 for heads of household.

    While the increase in the credit is currently temporary and only for 2021, just passed legislation in the House preserves the credit for 2022, with advance monthly payments of $300 for a younger child  and $250 per older child for all of 2022. What’s New About the Child Tax Credit in 2021?)
  2. Limitations on itemized deductions. If cash expenses that are eligible to be itemized fail to top the standard deduction, skip Schedule A and take the standard deduction. It’s that simple.

    If you itemize, please be aware that state and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above cannot be written off against income.

    However, the IRS does grant a workaround for some taxpayers.

    Taxpayers that use pass-through entities, including S-corporations, may benefit.

    It’s a complex maneuver, but one that’s being offered by more states.

    For 2022, the cap may rise and be subject to income limits. We’ll revisit this next year.

    For charitable contributions, subject to certain limits, taxpayers who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations.

    These limits typically range from 20%-60% of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization.

    For example, a cash contribution made by an individual to a qualifying public charity is generally limited to 60% of the individual’s AGI. Excess contributions may be carried forward for up to five tax years. IRS: Expanded tax benefits help individuals and businesses give to charity during 2021; deductions up to $600 available for cash donations by non-itemizers.

    If you don’t itemize, a deduction up to $600 available for cash donations in 2021.

    The IRS also allows taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income. You must itemize to take advantage of this deduction.
  3. Estates of decedents who die during 2021 have a basic exclusion amount of $11,700,000, up from a total of $11,580,000 for estates of decedents who died in 2020.  The annual exclusion for gifts is $15,000 for calendar year 2021, as it was in 2020.  (IRS provides tax inflation adjustments for tax year 2021.)
  4. The maximum credit allowed for adoptions for tax year 2021 is the amount of qualified adoption expenses—$14,440, up from $14,300 for 2020.
  5. Changes to the AMT. Trump-era tax reform failed to do away with the alternative minimum tax (AMT), but it snags far fewer people.

    The AMT exemption amount for tax year 2021 is $73,600 and begins to phase out at $523,600 ($114,600 for married couples filing jointly for whom the exemption begins to phase out at $1,047,200).

    The 2020 exemption amount was $72,900 and began to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption began to phase out at $1,036,800).

    It’s confusing, but most tax software programs run both calculations for you.
  6. Take advantage of a 20% deduction for business owners. The law provides “flow-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business.

    This is a valuable benefit to business owners who aren’t classified as C-corps and can’t benefit from 2018’s reduction in the corporate tax rate to 21% from 35%.

    Individual taxpayers and some trusts and estates may be entitled to a deduction of up to 20% of their net qualified business income (QBI) from a trade or business, including income from a pass-through entity.

    In general, total taxable income in 2021 must be under $164,900 for single filers or $329,800 for joint filers to qualify. In 2022, the limits rise to $170,050 for single filers and $340,100 for joint filers.

    The deduction does not reduce earnings subject to the self-employment tax.

    There are limitations to the new deduction and some aspects are complex. Feel free to check with your tax advisor to see how you may qualify. Most tax software programs perform the calculations. (IRS Qualified Business Income Deduction, Qualified Business Income Deduction (QBI): What It Is & Who Qualifies.)

The points above are simply a summary. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s talk.

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