Tax Planning Insights: November 2021

Here are several tax moves to consider as 2021 comes to a close.

Tax Planning Insights: November 2021
In this issue:
Tax Cutting Actions to Take Before Year-End
  • Accelerate income into 2021. Income tax rates may increase in 2022, with the top income tax rate projected to increase from 37% to 39.6%. If it makes sense, take advantage of 2021’s 37% rate by accelerating income into 2021 and deferring deductions to 2022. If you’re a business owner, bill clients or customers and encourage payment before December 31, 2021. Defer business deductions to next year by postponing capital purchases, and not prepaying 2022 expenses. Defer personal deductions for charitable donations, medical expenses, and state and local taxes into 2022.
  • Convert to a Roth IRA. Consider converting some or all of your traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. Although you pay income tax on the amount of the Roth conversion the year it is made, subsequent growth is tax-free in a Roth IRA, and withdrawals from the account are 100% tax-free after five years from the date of the conversion.
  • Gift money and other assets. Consider gifting assets to your children and other heirs, or into a trust for them, before the end of 2021. As long you make your gift in 2021, it will not be retroactively clawed back by the IRS if the estate and gift tax exemption amount decreases in 2022 from its current level of $11.7 million ($23.4 million for married couples).
  • Take your retirement distribution. If you’re age 72 or older during 2021, take your required minimum distribution (RMD) from your retirement accounts (other than Roth IRAs) by December 31, 2021. However, you can choose to wait until April 1, 2022 to make the withdrawal if this is your first RMD. If you don’t need the money, you can make a qualified charitable distribution of up to $100,000 directly from your non-Roth IRA to a qualified charity. These contributions are ordinarily tax-free and count toward your RMD (but they’re not deductible as charitable contributions).
  • Establish a 529 plan for education. Contributions to these plans are not tax deductible, but withdrawals for qualifying educational expenses (including private school tuition up to $10,000 per year) are tax-free. There are no annual contribution limits, but contributions over $15,000 per student count against the lifetime estate and gift tax exemption. You are permitted to contribute up to $75,000, or five years’ worth of gift-tax exemptions, in a single year as an initial contribution to a student’s 529 plan.