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November 2021 Tax Planning

November 11, 2021


Prior to getting into the holiday season, we wanted to reach out with some thoughts about tax planning that may apply to you.

2021 Recovery Rebate Credit

If you did not receive the full amount of the Economic Stimulus Payment before December 31, 2021, we can claim the 2021 Recovery Rebate Credit (RRC) on your Individual Income Tax Return.

The 2021 credit amount is $1,400 (or $2,800 in the case of a joint return), plus an additional $1,400 per each dependent of the taxpayer, for all U.S. residents with adjusted gross income up to a phase-out threshold of $75,000 per adult.

Charitable Giving

The American Rescue Plan enacted in 2020 provides a temporary above-the-line deduction in 2021 for up to $300 cash contributions for single taxpayers, and $600 for married filing jointly taxpayers, even if the taxpayer takes the standard deduction.

Donor Advised Funds are still great options to ‘clump’ donations into one year and then direct how those contributions are paid out over multiple years.

Qualified Charitable Distribution (QCD)

These are underutilized to easily reduce your taxable income in retirement. If you are 70 ½ or older, and have an Individual Retirement Account (IRA), then you might want to consider a Qualified Charitable Distribution (QCD). Rather than taking a distribution from your IRA and then giving cash or property to a charity, you can make a QCD, which allows for a direct transfer from your IRA to a charity. In turn, you do not recognize the income coming out of your IRA as income, and you do not take a charitable deduction for the amount going to charity. The maximum allowed QCD per taxpayer is $100,000. This technique can often provide a higher per dollar tax benefit because it directly reduces a taxpayer’s AGI.

Retirement Plan Contributions

Contributing to a retirement plan not only provides savings for future years, but it could also provide a current tax benefit. Depending on your income level, you could get a tax deduction for the contributions made to a 401(k), IRA, or SEP account. These contributions either directly reduce your taxable wages, if funding through an employer sponsored plan, or are taken as an above the line deduction on your tax return. In both cases, they directly reduce your AGI.

For business owners, you may also want to think of establishing a “Cash-Balance” Defined Benefit Program – through which you can defer large amounts of current income into a deferred retirement plan. The tax savings could be substantial.

Health Savings Account Contributions

If you have a high-deductible health insurance plan, you might be able to contribute to a Health Savings Account (HSA) and receive a tax deduction. The maximum contributions for 2021 are $3,600 for self-only coverage and $7,200 for family coverage, with an additional $1,000 contribution allowed for taxpayers over 55. One useful aspect of an HSA is once you fund it, you can either invest the money within the account and save for future qualifying medical expenses, or you can fund and use the HSA within the same year.

Estate Planning Considerations

Lifetime gifts are becoming more important as we predict the Estate Tax landscape to change. Remember that you can contribute $15k per person per year to any number of recipients without filing a Gift Tax return or using any of your Estate Tax exclusion.

Similar to last year the main consideration in the short term is for high-net-worth families to consider using portions of the current “applicable exclusion amount” or “AEA” to effectively gift up to $11.5 million to heirs before the current exclusion amount sunsets in 2026 or the AEA amount changes due to new legislation.

If you haven’t setup an Estate Plan to direct your legacy and avoid Probate Court, I believe it is time to put that in place.

As always, we hope to connect soon.

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