There’s no need for us to act like “deer in the headlights” when it comes to a new tax bill. Instead we suggest you review your current tax situation and consider the following year-end tax strategies. Always consult your tax advisor before implementation.

1. Maximize your retirement savings.

Tax-advantaged retirement accounts, such as a traditional IRA or 401(k) plan, compound over time and can be funded with pre-tax dollars and sometimes after-tax dollars. Contributions on a pre-tax basis lower your taxable income for that year.

For the current tax year, the maximum allowable 401(k) contributions are as follows: 

  • $19,500 up to age 49
  • $26,000 for age 50 and over

For the current tax year, the maximum allowable IRA contributions are as follows:

  • $6,000 up to age 49
  • $7,000 for age 50 and over

2. Take any required minimum distributions (RMDs) from traditional retirement accounts (if you’re age 72 or older).

All employer-sponsored retirement plans, traditional IRAs, and SEP and SIMPLE IRAs require regular minimum distributions (RMDs) by April 1 of the year that follows the year you turn 72. Thereafter, annual withdrawals must happen by December 31.  

If you don’t need the cash flow and would prefer not to increase your taxable income, you may want to consider a qualified charitable distribution (QCD). A QCD is a direct transfer (the check is payable to the charity) from your IRA account to a public charity. Note, you won’t get a charitable contribution itemized deduction. By doing a QCD with all or some of your RMD, you can reduce your income, which is a tax benefit. QCDs are limited to $100,000 per year.

Keep in mind that to do a QCD you need to be at least 70 ½ years old so you can execute your contribution before RMDs actually start. If you are struggling to itemize your deductions and are at least 70 ½, you might want to consider a QCD. One note, a QCD cannot go to a donor-advised fund, it must go directly to a public charity.

3. To itemize your tax deductions, consider a tax smart move called “bunching.”  

To itemize your deductions you need to get over the hurdle of the standard deduction based on your filing status. Bunching refers to accelerating and grouping your deductions into one tax year in order to receive the maximum possible tax benefit. Charitable contributions are a popular deduction to bunch into one tax year to hurdle the standard deduction.

2021 standard deduction amount based on filing status:

Married: $25,100
Single or married, filing separately: $12,550
Head of household: $18,800

Certain expenses, such as the following, can be classified as itemized deductions:* 

  • Medical and dental expenses
  • Deductible taxes
  • Qualified mortgage interest, including points for buyers
  • Investment interest on net investment income
  • Charitable contributions
  • Casualty, disaster and theft losses

This is a good time to look over last year’s return and compare to your 2021 projection amounts. You still have to time to move deductions into the current year. Charitable contributions is where many taxpayers can exercise control on timing, which leads us into the next tax tip.

4. Strategic use of your donor-advised fund (DAF) for charitable giving.

A donor-advised fund is like a charitable vessel for the purpose of organizing your charitable mission and supporting organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund you can take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to IRS-qualified public charities.

Popular gifts to the DAF are cash and appreciated securities. Consider gifting appreciated securities. Gifting securities with a fair market value of $15,000 with a cost of $5,000 could save $2,380 in tax ($10,000 * 23.8%) because you won’t have to recognize the tax gain. Plus you still receive a $15k charitable contribution deduction. That’s a “twofer!” The current top federal marginal tax bracket long–term capital gain rate is 23.8%.

Bunching your charitable contributions into 2021 and then lumping them into a donor-advised fund can help maximize your itemized deductions for the year.

5. Federal tax rates are historically low but may not stay that way for very long.

Historically speaking the current income tax rates are low. Consider doing a Roth conversion by December 31, 2021. A Roth conversion is taking a traditional IRA and converting it a Roth IRA. 

Generally, a Roth conversion has a tax bill associated with it. You could look to mitigate the tax bill by pairing favorable tax strategies, such as with additional charitable contributions.

Why consider a Roth conversion? 

Roth IRA distributions can be withdrawn tax-free in certain circumstances.1 Having access to tax-free cash in retirement helps keep the tax temperature from getting too hot even if tax rates increase.

A Roth IRA will also compound income tax-free for beneficiaries. Those inheriting a Roth IRA could let tax compounding continue for 10 years in most cases.

Roth IRAs remove the uncertainty of what future tax rates will be, and if rates increase, Roth IRA income can be more valuable.

Roth IRAs have a required minimum distribution (RMD) benefit, which is no RMDs during the owner’s lifetime.2 Also, a spouse can roll over an inherited IRA to their own Roth IRA and continue the RMD benefit.

When considering a Roth conversion, a tax projection is recommended to see how conversion income impacts your taxes. 

Remember, there are no income limits for Roth conversions, nor is there a limit on how much you can convert. Roth conversions are not reversible; once done that’s it. Doing a series of small Roth conversions can help keep you in your current tax bracket each year.  

Tax planning is a year-round exercise that requires active participation. If you want to lower your tax bill, work with your advisor and tax coordinator in an effort to make tax smart moves.

If you’re an advisor, register for our webinar on November 2 to learn about actionable tax saving ideas for your clients and prospects. 

*Certain limitations may apply. 

1. Qualified Roth distributions are tax-free if:

  • Held for five years since the first Roth conversion or contribution; and
  • Age 59 ½, or
  • Disabled, or
  • Death (paid to a beneficiary), or
  • First-time homebuyer – Up to a $10,000 lifetime limit

2. Beneficiaries must take required minimum distributions

Keep in mind IRA Distributions are taxable:

  • Income taxes on Social Security benefits can increase,
  • Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available),
  • AGI limitations trimming itemized deductions can apply, and
  • Medicare insurance premiums can increase.

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI).

Neither SEI nor its subsidiaries provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. 

Investing involves risk including possible loss of principal. 

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes only and should not be interpreted as research, legal opinion or advice.


Legal Note

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company. The content is for educational purposes only and is not meant to provide investment advice or as a guarantee of any specific outcome. While SEI welcomes comments, SEI is not responsible for, and does not endorse, the opinions, advice, or recommendations posted by third parties. The opinions expressed in comments are the view(s) of the commenter(s), and do not represent the views of SEI or its affiliates. SEI reserves the right to remove any content posted by users of this site in its sole discretion.

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