Op-ed: Here are some smart tax moves to consider before Dec. 31

Personal finance

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For the better part of the last two years, uncertainty has been the reality of everyday life. In the context of tax law, this is especially true. As taxpayers face potential new tax legislation by the end of the year, it’s difficult to strategize with so much yet to be decided.

The consensus from financial experts is that tax rates will rise. The question remains to what extent and how much of the burden will be imposed by year’s end.

There are still effective tax strategies which can be implemented now. While everyone’s individual tax situation requires specific recommendations, there are some general moves to consider before Dec. 31.

For investors:

  • Recognize capital gains. Take some time and review unrealized capital gains with your wealth manager before year-end to capture the appreciation in a potentially lower tax year.
  • Tax-loss harvesting allows you to maximize the deductible net capital loss of $3,000 for the year after offsetting capital gains.
  • Don’t forget about the long-term capital gain rate of 0%, 15% and 20% – you can pay lower tax rates on the sale of assets held over one year, depending on your taxable income.
  • The opportunity zone investment deadline is Dec 31. It applies to the five-year, 10% basis adjustment and gain exclusion before 2026. 

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For employees:

  • Maximize retirement contributions. Review your deferral limits before the end of the year and defer taxes by maximizing your contributions in the remaining pay periods.
  • Maximize flexible spending accounts (FSAs) and dependent care spending accounts for 2021.
  • Maximize health savings account (HSA) contributions, if you have a qualified high-deductible health plan.
  • Remember those catch-up contributions. Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions in a qualified retirement account. Eligible individuals who are over age 55 by the end of the calendar year are allowed to make additional “catch-up” contributions to their HSAs.
  • Review your tax withholding and make changes as needed.

For retirees:

  • Maximize your individual retirement account contributions, whether deductible or non-deductible.
  • Take your required minimum distribution. That’s the IRS-mandated amount of money that you must withdraw from traditional IRAs or an employer-sponsored retirement account each year. You need to start taking it at age 72. (Congress allowed people to suspend taking RMD distributions for 2020 as part of Covid-19 relief, but RMDs are back on for 2021.)
  • Consider a Roth conversion. If you are in a lower tax bracket than you anticipate in the future, it may be time to convert.
  • Consider qualified charitable distributions. Now that RMDs are back, you can reduce your adjusted gross income up to $100,000.

Bunch your tax deductions: Here’s how bunching itemized tax deductions works. You group as many tax-deductible expenses as possible into a single tax year. In the year that you have bunched your itemized deductions, you itemize on your taxes. The following year, you take the standard deduction. “Bunching” means you need to carefully plan the timing of your deductions by making them in one year instead of two. In doing so, you’ll receive a greater tax benefit for the same dollar amount of deductions.

Charitable giving: Consider bunching charitable deductions in the current year with a donor-advised fund, so you increase your charitable deduction and your itemized deductions exceed your standard deduction. This will allow you to deduct the charitable contribution this year and defer the donation decision to a specific organization to a later period.

Estate tax planning: The official estate and gift tax exemption climbs to $12.06 million per individual for 2022 deaths, up from $11.7 million in 2021, according to new IRS inflation-adjusted numbers. That $12.06 million estate tax exemption is set to be cut in half at the start of 2026 due to the expiring provisions in the 2017 Tax Cut and Jobs Act. The consensus is that the current exemption is probably as good as it gets and the best strategy might be to use it up, regardless of proposed legislation.

— By Kelly Haggerty, CPA and partner at The Haggerty Group

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