Don’t Forget These Important End-of-Year Deadlines

Do you have a to-do checklist for December? It might include buying gifts, ordering a turkey, and sending out cards. In the midst of the busyness of the holidays, it can be easy to forget about your end-of-year financial checklist. However, December 31^st is the deadline to make several important tax decisions that could affect you come filing season next year. Don’t forget these important end-of-year deadlines!

• Review Your Retirement Account Contributions

It’s not too late to max out your 401(k), IRA, or other retirement accounts for 2021. At age 50, workers can make annual “catch-up” contributions in addition to their normal contributions. In 2021, you can contribute up to $6,000 to an IRA if you are under 50 and an additional $1,000 if you are 50 or older. Those 50 and older can also contribute an additional $6,500 to a 401(k), 403(b), most 457 plans, and a government Thrift Savings Plan in 2021 for a total of $26,000.[1]

• Make Your Charitable Donations

Tis the season for giving, and you may be making a few charitable donations. If you itemize your taxes, you can deduct qualified charitable contributions. Normally, there is a cap on how much someone can donate to charity tax-free—this cap is 60% of a taxpayer’s AGI (Adjusted Gross Income). However, the CARES Act raised this limit to 100% of AGI for the 2020 and 2021 tax years. There is also a provision that allows individual taxpayers who don’t itemize to deduct up to $300 in charitable donations and married couples filing jointly to deduct up to $600 in 2021. However, this year, the tax break is no longer “above the line,” meaning that a charitable donation cannot be subtracted from adjusted gross income.[2]

• Consider a Roth Conversion

You may be considering a Roth IRA conversion by December 31^st. In this case, you would pay tax on the funds converted and then be able to withdraw them tax-free later. There are reasons why we could see taxes increase in the near future, and a Roth conversion is one way to plan ahead. If you’re wondering what exactly a Roth conversion is and if you should do it, come talk to us. Whether or not you should do it and how much you should convert depends on your individual situation. Note that Roth IRA conversions are irreversible and that money can’t be withdrawn penalty-free until five years after it’s converted, and typically until age 59 ½.[3]

• Consider a Qualified Charitable Distribution (QCD)

For IRA owners older than 70½, a QCD is one of the most tax-advantaged ways to make charitable contributions. A QCD is a distribution made from an IRA directly to a qualifying charity. QCDs can be counted toward satisfying all or part of your required minimum distributions (RMDs) for the year, as long as certain rules are met.

In addition to the benefits of giving to charity, a QCD excludes the amount donated from taxable income, which is unlike regular withdrawals from an IRA. Keeping your taxable income lower may reduce the impact to certain tax credits and deductions, including Social Security and Medicare. Also, QCDs don’t require that you itemize, which means you may decide to take advantage of the higher standard deduction, but still use a QCD for charitable giving.

We would love to be part of your financial team this time of year and throughout the rest of the year. These things are just a few of the end-of-year tax planning moves you could potentially make. Make time to talk to us about your tax minimization strategy for now and in the future.