As we approach the end of the year, it's an excellent time to
do some tax planning, and you might be busy with holiday events and
other deadlines, but you have to remember that some opportunities come with
an expiration date. So we're going to talk about some of the bigger
tax planning opportunities at the end of the year, and hopefully this will
give you some ideas. We're primarily going to focus on some investment and
retirement related opportunities, but if you speak with your CPA, speak
with a financial professional, you can get a lot more ideas on other
things that might be appropriate for you. A first step is going to
be to review your situation, and so figure out where you stand,
how much income you've had so far for the year. And what is
the source of that income? Is it investments? Is it earnings from your
job, is it something else? You want to know the nature of that
income and kind of tally all of that up, it's also a good
time to review any expenses you've paid and any retirement account contributions,
that sort of thing. So as you go through the process,
you can often identify opportunities where you might have forgotten to make
contributions, and it's important to know how much cash you have on hand
in case you do want to spend money, anything like maybe paying taxes
for... Roth conversions, for example. As you go through the process,
be sure to keep a big picture view, I know how tempting it
can be to want to pay as little as possible in any given
year, but it might actually make sense to pay some taxes even when
you don't have to. So as you look at whatever your goals might
be, whether that's retirement income for something else, look at where it
might make sense to intentionally pay some taxes. So let's start with some
charitable giving. In 2021, it's pretty easy for taxpayers to get a little
deduction by making cash contributions to qualifying charities, and that's
as a result of some pandemic related rules that went into place,
so you can do up to $300 if you are a single taxpayer,
or married filing jointly, that goes up to $600, so if you haven't
already reached that limit and you want to do some giving,
that's an excellent way to do it. If you want to make some
bigger gifts to a charity or to a non profit, you can give
appreciated securities, and what that means is that you have an investment
that has gained value since you originally bought it. Now, if you want
it to just give cash to a non profit, you might need to
sell that investment and you have capital gain, so you'd owe capital gains
taxes on the difference between where you bought and where you sold,
but if you just give the investment shares to the non profit,
like shares of stock or mutual fund shares or ETF shares,
for example, then you don't necessarily need to sell the investment and
you don't realize the taxable gain, and when you do that,
that maximizes what ends up in the charity's hands because you don't have
to take out what you would have paid in taxes. And if you're
over age 70 and a half, you can potentially do a qualified charitable
distribution, and that's where you take money directly from, let's say your
IRA, and you send that directly to a charity, a qualifying charity,
and by doing that, you get to exclude that distribution from your income,
that can be helpful in a variety of ways, basically by keeping it
out of your taxable income. This is a good time for a friendly
reminder that we can't possibly cover everything in a short video like this,
and there are probably other opportunities and exceptions and
ins and outs that we're just not going to cover here,
so you do need to check with a tax expert or do some
additional research on your own, and that way you reduce the chances of
having any problems. Now on to employer plans, so you might have a
few pay periods left to save some money, we're talking about retirement
savings on this page, so if you still haven't maxed out an employer
plan and you would like to do that, contact your employer,
talk with the payroll department, and ask them to adjust your withholding
so that you can get up to wherever you want to be,
and if you have self employment income, the deadline to establish a plan
is generally December 31st, you don't necessarily need to fund it,
but if you want to establish a 401k plan, you typically need to
do that by your end. Other types of retirement plans might allow you
to establish them next year, next calendar year, but if you're looking at
a 401k, this is the time to take action. For those individual tax
favored accounts. You may have some extra time, you might have until the
tax filing deadline in April, so that's going to be your traditional and
Roth IRA contributions and HSA or a Health Savings Account, you have some
extra time to get money into those. Of course, if you
set that timeline back by a couple of months, then each year,
you're going to be a little behind. So it's nice to do that
in a calendar year, if you're able to do so. If you have
investments that have either gained or lost value, there may be an opportunity
for you, so a lot of people are familiar with tax loss harvesting,
that is when you sell something that has lost money since you bought
it and you lock in that loss for tax reasons, and by doing
that, you can offset some gains and you can potentially offset some of
your taxable income, which can really be helpful, of course, you want to
be mindful of the wash sale rule, so be careful about buying back
into a substantially identical security after you do that, but it's something
you might use, and then there's also tax gain harvesting. That one surprises
a lot of people, you can potentially sell investments that have a gain
at a zero percent capital gains rate, so you have to be below
certain income thresholds for that, but it's really a great strategy if
it works for you. Next is to look at your withholding if you're
still in your working years, so maybe you're getting a big tax bill
at the end of the year, maybe you're getting a big refund and
you would prefer to smooth out your cash flows, whether you just want to
be able to put money aside each month regularly or for whatever reason
it's causing problems, that's certainly something you can do. And the IRS
as a handy withholding calculator you can use to figure out how much
might be appropriate for you to withhold. For 2021, those RMDs are back.
These are required minimum distributions, so if you are over a certain age,
the age has been changing, but let's say 72 ish, then the IRS
requires you to take money out of certain retirement accounts. Didn't have
to do that in 2020, you might have gotten out of the rhythm
or you might have turned off some automated distributions, but it's time
to get back on track, the penalty for missing an RMD is steep,
it's 50% of the amount you were supposed to take... So if you
were supposed to get $5000 out, that's going to be a $2500 penalty.
That's a lot of money. And it's hard to stomach. Now,
if you are still working and you've got a 401k and you're not
an owner, of any type or any meaningful type at the company you
work for, it's possible that you can hold off on those RMDs,
but you want to be very careful. Next, we have Roth conversions,
so it could make sense for you to take pre tax retirement savings,
pay some tax on that money on purpose, and then convert it to
after tax Roth money. Now, if you follow all of the IRS rules,
you can eventually take that money out tax free in retirement,
this strategy might make sense if you think the tax rates are going to be
higher in the future, or if you have a particularly low income this
year. So for example, you might think "I'm okay with paying taxes at
whatever the cost is this year, because I think that's a better deal
than whatever I would have to pay in the future," that's a way
to go about doing Roth conversions and a good justification for doing so,
so this is something that might go away in future years,
we really don't know, but there have been some proposals that would get
rid of, let's say back door contributions or mega back door Roth contributions.
So you might even still be able to do the normal Roth conversions,
we just don't know how long all of these strategies will last,
but be aware that... These may be on the chopping block.
I can tell you that what I've been hearing from people is that
things are taking a lot longer, so if you do want to do
something by year end, it's critical to get the ball rolling sooner than
later, start doing your research, start making decisions, because we just
don't know how long things are going to take. Everybody is short staffed
and that includes your investment companies, your custodians, and the people
who need to do these transactions for you. So I hope you found
this helpful. If so, please leave a quick thumbs up, thanks for watching
and take care.