2021 Year-End Tax Planning

Time for Taxes Money Financial Accounting Taxation Concept

{6 minutes to read}  Let’s look – strategically and intentionally.

As we look back, consider the wise words from two individuals who share the same first name:

Warren W. Wiersbe, an American clergyman/biblical teacher wrote, “you do not move ahead by constantly looking in a rear-view mirror. The past is a rudder to guide you, not an anchor to drag you. We must learn from the past but not live in the past.” 

Warren Buffet, any thoughts on when to look back? “In the business world, the rearview mirror is always clearer than the windshield.”

While we wait for the legislators to meet on common ground considering the tax implications for next year, there are some decisions we can make now that could impact our 2021 tax liabilities.

Key Takeaways:

  • Pandemic relief: One that could impact us in 2021 is retirement withdrawals.
  • Larger deduction on meals and cash donations.
  • Pre-tax payroll deductions – update selections.
  • Life-changes decisions, update beneficiaries, consider starting a “will.”
  • Roth conversion – if income is low – considering the proposed increase in taxes. 

First, let’s look back at the 2020 tax year and review some of the items that may impact us in the current year under the Coronavirus Aid, Relief, and Economic Security Act (CARES). The CARES Act offered numerous reliefs to taxpayers. They benefited us for the 2020 tax year, but some have expired. Nonetheless, some of these income types of relief spillover (or change) in 2021 and could create a costly tax impact. Here are a few:

  1. Retirement distribution allocation: Did you withdraw money from your retirement savings in 2020 – and choose to allocate your withdrawal(s) over the 3 years? If yes, there are tax implications on the amount allocated for 2021.
  2. Early withdrawal penalty: In 2020, the early withdrawal penalty was waived, however, if you withdraw retirement funds in 2021, you may be faced with a 10% penalty on the amount – in addition to your other tax liabilities.
  3. Required Minimum Distribution (RMD): This is an age-required distribution that was also waived for 2020, however in 2021 there’s a requirement to take the RMD which is a taxable event. If you feel a little charitable, you can reduce the tax impact by donating directly to an organization –see below.
  4. Unemployment income – If you collect unemployment income in 2021, it is taxable under the federal government and some states. 

Second, let’s look at some temporary deduction benefits that are still available to us:

  • The Consolidated Appropriations Act (2021), known as CAA, was passed by Congress on December 21, 2020, and signed into law on December 27, 2020. The act includes some items that can help reduce our tax liabilities, one of which is the meals deduction.
    • Meals – under the CAA, food, and beverages will be 100% deductible if purchased from a restaurant in 2021 and 2022. In the past, only a 50% deduction was allowed on most meal expenses. Note: It is important to keep itemized receipts in case you are called upon to present them to any of the tax agencies.
  • ‘Tis the season for giving: Under the CARES Act, individuals can deduct up to 100% of their AGI (in the past, only up to 60% was allowed) of cash donations made in 2021. Corporations can deduct up to 25% (in the past only 10% was allowed).

Third, here is a shortlist of moves you can still make in 2021 that could reduce your tax liabilities.

  • Deferred tax on retirement contributions: if your employer plan allows it, consider contributing the maximum to your savings. The IRS limit is $19,500; if you are fifty and over, the max is $26,000.
  • Retirement savings for self-employed: if you have not yet done so, you can set up a retirement plan in 2021 and delay contributing until 2022. Some plans allow this privilege; discuss your options with your financial advisor.
  • Investment loss: Do you have a large amount in harvested (accumulated) capital losses? Consider speaking with your financial advisor about capital gains types of investment strategies.
  • Savings for education: make your state-affiliated 529 Plan contributions before the end of the year.

On a related note, considering the proposed tax increases, if your income is low in 2021, consider a Roth conversion.

Lastly, don’t forget to make some of these life-changes updates:

  • To employees — update your payroll-related withholdings — such as W-4, insurance, 401K, dependent care, HSA/FSA, etc.
  • To all — update your beneficiary information with your financial institutions — with the fickleness of human nature — God only knows the unforeseen events that could impact us, financially.
  • To all — the “will” — consider consulting an attorney to begin the preparation of a will. You may agree with me, that the current pandemic reminds us how fragile we are – and how little control we have over our own lives. You are welcome to reach out to me for a referral. Choose an attorney who is willing to walk you gently through this process.

As I close, let us choose to look back with intent. If you would like to schedule a tax planning consultation, please don’t hesitate to reach out.

Continue to stay well and safe,

Nadine 

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com

The Masterpiece Accounting Group web, blogs, and articles are not rendering legal, accounting, or other professional advice. Tax strategies and techniques depend on your specific facts and circumstances. You should implement the information in this newsletter only with the advice of your tax and legal advisors.