2021 Year-End Tax Checklist

With so many potential tax changes ahead, it’s time to make sure you’re checking all the boxes on things you can do to protect your wealth.

As 2021 draws to a close, now is the time to ensure your wealth plan reflects any changes in your circumstances or goals, the economic landscape, and the current tax environment. Proposed legislation presents drastic changes to the tax law that may require adjustments to your plan before the end of the year.

Review the checklist below for potential strategies to consider, and work with your wealth management team to take action prior to the December 31 deadline.

Income Tax

  • Accelerate income into 2021 to avoid proposed tax rate increases in 2022.
  • Defer net investment income or reduce modified adjusted gross income (MAGI) to minimize or avoid the 3.8% surtax on net investment income, which applies to MAGI over $200,000 (single taxpayers), $250,000 (married filing jointly) and $125,000 (married filing separately).
  • Review plans to sell assets, other than publicly traded securities, on the installment basis. Installment sales could result in deferring gains into higher income tax brackets under proposed tax legislation.
  • Consider accelerating itemized deductions into 2021 if in the 32%, 35% and 37% tax brackets, if your total itemized deductions will exceed the standard deduction, as itemized deductions may be capped at a 28% tax benefit in the future. Similarly, consider deferring deductions if there is an expectation that they will provide a greater benefit under the higher tax rates proposed for 2022.
  • Review income tax withholding and estimated tax payments. If potentially subject to a penalty for underestimated payments, consider increasing withholding from wages and bonuses in the fourth quarter. Amounts withheld are deemed to be paid equally over each quarter, which can minimize or eliminate an underestimation penalty in the previous three quarters.

Year-End Gifting Opportunities

  • Take advantage of the 2021 annual gift exclusion to transfer wealth to future generations or to make tax-free transfers on behalf of another individual by paying education or medical expenses directly to the provider. The 2021 annual gift exclusion allows for tax-free gifts up to $15,000 per donee without it counting toward your lifetime gifting exemption. In 2022, the gift tax annual exclusion is projected to increase to $16,000 per donee.

Charitable Giving Considerations

  • Contributions can be made and be tax deductible for 2021.
  • Take advantage of the ability to deduct up to 100% of adjusted gross income (AGI) for a cash gift to a public charity, which has been extended to 2021. Contributions to a donor-advised fund or supporting organization do not qualify for the increased 100% of AGI limitation.
  • A gift to a donor-advised fund can be used to secure a charitable deduction in 2021 while deferring a distribution to a public charity to a later year.
  • “Give away the gain.” Give appreciated assets held longer than one year to a public charity to get a fair market value income tax charitable deduction while avoiding income tax on the appreciation.
  • Combine multiple years of charitable contributions into a single year in order to exceed the standard deduction threshold required to fully deduct contributions.
  • Remember that charitable gifts of appreciated property like real estate, or closely held stock to a private non-operating foundation, only qualify for a deduction equal to the cost basis of the asset. An exception exists for “qualified appreciated stock,” which is eligible for a deduction equal to the fair market value. “Qualified appreciated stock” is defined, in general, as publicly traded stock.
  • If over 70 1/2 years old, consider making a direct transfer from an IRA to a public charity. The distribution is excludable from gross income if certain requirements are met. Distributions to a donor-advised fund or supporting organization do not qualify for this “IRA Charitable Rollover.”
  • Convert a traditional IRA to a Roth IRA and simultaneously gift cash to a public charity, offsetting the income tax liability of the Roth Conversion. This idea expires after 2021.

Act soon:

- December 1, 2021: Recommended date to initiate gifts of qualified, appreciated stock or wire transfers

- December 1, 2021: Recommended date to initiate an IRA Charitable Rollover.

- December 31, 2021: The last day charitable contributions can be made and be tax deductible for 2021. 

Retirement Plans

  • Maximize contributions to retirement accounts, such as 401(k), traditional IRA, Roth IRA, SEP and Simple. Keep in mind that proposed legislation may limit the size of these accounts in future years. If age 50 or older, make “catch-up” (up to $6,500) contributions to eligible retirement accounts.
  • Consider converting a traditional IRA to a Roth IRA. While this will result in taxable income in 2021, assets will accumulate tax-free in the Roth IRA and allow for tax-free distributions in the future when income tax rates may be higher. Note, however, that a Roth IRA conversion will increase AGI and possibly reduce tax breaks tied to AGI or MAGI.
  • Review retirement account beneficiary designations given the drastic changes in the mandatory distribution period made by the SECURE Act.

Interest Rates

  • Consider strategic borrowing, as opposed to selling and incurring a taxable gain, to support tax planning given that interest rates are near historic lows.
  • Take advantage of the current low interest rate environment by reviewing outstanding debt or existing contracts tied to interest rates and consider whether refinancing or swapping out of an adjustable-rate loan for a fixed rate would be beneficial.

Estate Plan Updates

  • Review wills, trusts and other estate planning documents to ensure that they reflect any changes in your personal or financial situations that occurred in 2021 and are likely to occur in 2022.
  • Leverage the current $11.7 million ($23.4 million for married couple) federal estate, gift and generation skipping transfer tax (GSTT) exemption before it sunsets in 2026, or is reduced by proposed legislation, to transfer wealth and potentially mitigate some of the estate and/or gift tax burden. For married couples, consider using one spouse’s full exemption instead of using a portion of each spouse’s exemption, because if the exemption is reduced to the projected $6 million, one spouse will still have their exemption.
  • Take advantage of the current low interest rate environment, coupled with an increased exemption, to deploy techniques like intra-family loans, installment sales to intentionally defective grantor trusts, funded irrevocable life insurance trusts (ILITs), grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs) and charitable lead annuity trusts. While intra-family loans and non-grantor charitable lead annuity trusts remain viable, proposed legislation may adversely affect implementing installment sales to intentionally defective grantor trusts, GRATs and SLATs, as well as future premium payments through transfers to the ILITs before year end. Caution is imperative until there is more clarity surrounding proposed changes to these traditional estate planning vehicles.
  • Evaluate allocating increased generation-skipping tax exemption to trusts that are not fully exempt from the generation skipping tax. Action is advisable before the generation skipping tax exemption sunsets in 2026 or is reduced by proposed legislation.

Investment Considerations

  • Rebalance to keep your portfolio on track to meet its intended goals, whether by selling assets that are overweighted in the portfolio, purchasing securities in asset classes that are underweight or simply adjusting future investments to compensate.
  • Offset the tax impact of any realized gains taken this year by harvesting losses in the portfolio or, in some cases, realizing gains to offset losses (for example, to reduce concentrated stock positions). Consider putting off taking capital losses if proposed tax rate increases are enacted. Capital losses will generate a better tax result when offsetting gains taxed at a higher rate.
  • Sell mutual fund shares, and delay buying new shares, before dividend record date to avoid year-end capital gain distributions or “buying the distribution.”
  • Consider investing in an Opportunity Zone fund to defer the capital gain tax on direct 2021 gains.
  • When selling securities, choose the tax lot that will yield the most favorable tax benefit.
  • Confirm that your investment policy statement is up to date and accurately reflects your investment objectives.

Download the checklist, and talk to your wealth, tax and legal advisors about any 2021 changes to your net worth statement for additional tax-saving strategies.

  • This material is provided for illustrative/educational purposes only. This material is not intended to constitute investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of all of the investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.