In 1789, Benjamin Franklin said, “Nothing is certain except death and taxes.” The good news is that there are some things we can do, such as healthy eating and exercise, to attempt to defer the first event, and there are actually several steps we can take to defer—as well as reduce—our taxes.
I hate thinking about taxes, but if you’ll allow me another Franklin quote, “If you fail to plan, you are planning to fail,” is more critical today than ever—especially in light of the proposed tax hikes awaiting us in 2022.
But first, let’s look at the following graph from Fidelity. I first introduced it last fall, and here is the updated version.
These are the results of Fidelity’s research for the past 20 years on how you can save on your investment taxes by tax-loss harvesting, managing capital gains, managing distributions and tax-smart withdrawals.
As you can see, the earlier your planning begins, the faster your savings accumulate. But it’s also obvious that, even if you started just in the past few years, you would have still saved on your taxes. So, the lesson is—it’s never too late to begin some tax-saving strategies!
So, let’s get started!
2021 Tax Law Changes
Following are the 2021 tax brackets for single payers and taxpayers who are married, filing jointly.
| Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Jointly) |
| 10% | Up to $9,950 | Up to $19,900 |
| 12% | $9,951 to $40,525 | $19,901 to $81,050 |
| 22% | $40,526 to $86,375 | $81,051 to $172,750 |
| 24% | $86,376 to $164,925 | $172,751 to $329,850 |
| 32% | $164,926 to $209,425 | $329,851 to $418,850 |
| 35% | $209,426 to $523,600 | $418,851 to $628,300 |
| 37% | Over $523,600 | Over $628,300 |
Source: Internal Revenue Service
As you’ll note, the income levels were slightly modified upwards from 2020, and there are a few other changes to the tax code that you should know.
Here are the 2021 tax categories for capital gains and dividends:
Required Minimum Distributions (RMD). Last year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waived required minimum distributions (RMDs) for 2020 tax returns. They are back this year. You must take them by December 31 unless you turned age 72 during the year. If that is the case, you can defer your RMD until April 1.
If you don’t take your RMD, you may be subject to a 50% excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
After that, annual withdrawals must be made by December 31 to avoid the penalty. When you make withdrawals, consider asking your IRA custodian to withhold tax from the payment. Withholding is voluntary, and you set the amount, but opting for withholding lets you avoid the hassle of making quarterly estimated tax payments.
You may not be aware of this, but if you are at least age 70 and a half, you can also count qualified charitable deductions (QCD’s) toward your RMD—up to $100,000 per year—if you make them directly from a non-Roth IRA to a qualified charity to reduce your adjusted gross income (AGI).
And speaking of charitable deductions, 2021 brings us the Above-the-Line Charitable Contribution Deduction. Even if you don’t itemize your taxes, this year, you can deduct $300 above-the-line, for cash contributions to qualified charitable organizations ($600 for married filing jointly).
Also, in 2021, there is an Increased Limit for Cash Contributions. The AGI limit for cash contributions made to qualified charities has been increased to 100%. However, donations to donor-advised funds and private foundations are not eligible for the increase. And if you are making both cash and noncash contributions, such as stock, or if you don’t itemize, please check with your tax advisor to determine your limit.
You can also offset 80% of your taxable income (per year) by claiming Net Operating Losses (NOL). You can then carry forward any remaining NOL into future years. However, farm losses have a two-year carryback period. And if you claimed NOLs prior to January 1, 2018, you would have to account for those separately, as they were limited to a 20-year carryforward.
If you own a business that is not a corporation, you can deduct Excess Business Losses—a net trade or business loss up to a maximum of $262,000 ($524,000 for joint returns) in 2021. You may include business gains and losses reported on Form 4797, but you cannot include W-2 wages. And any losses above the maximum then become a NOL, which can be carried into future tax years.
Personal protective equipment (PPE) purchased to prevent the spread of COVID-19 is a Qualified Medical Expense as of January 1, 2020. Or you may pay for them, or be reimbursed, through your medical expense accounts such as FSAs, HRAs, HSAs, and MSAs. If the expense isn’t paid for or reimbursed in that manner, you can deduct it as a medical expense, if your total medical expenses are more than 7.5% of your AGI, and you itemize your deductions.
The Child Tax Credit (CTC) was increased by $1,600 for children under age 6 and by $1,000 for those ages 6 to 17, for 2021. And it became fully refundable. For joint filers and qualifying widow(er)s, the increase begins phasing out with AGI of more than $150,000 ($112,500 head of household, $75,000 for all other taxpayers). This phaseout for the increase is calculated separately from the phaseout for the base $2,000 per child credit.
A change was made in July to allow families an immediate benefit, with six advanced monthly payments of the credit. These payments were based on your 2019 or 2020 tax return. The payments do not exceed more than 50% of the projected CTC. They are up to $300 per month for each qualifying child under age 6 and up to $250 per month for children ages 6 to 17. Because it may be beneficial for you to opt out of the advanced payments, please consult your tax advisor.
If you deferred half of your Social Security taxes for 2020, you must Repay half by December 31, 2021. The remainder is due by December 31, 2022. In order for the repayment to be properly applied, it must be made with a separate tax payment and noted that it’s for “deferred Social Security tax.”
Tax Breaks
In addition to knowing about the new tax rules, here are several other ideas to help you maximize your income and minimize your taxes.
Defer your income. If you think you will earn less next year and may, therefore, be in a lower tax bracket, there are several ways to push this year’s income into next year’s tax year.
- If you are an employee, defer year-end bonuses (if your employer approves) into 2022.
- If you are self-employed, delay billings until the end of the year, so you will be paid in the new year.
Accelerate some tax deductions. Another way to lower your tax bill this year is to increase your deductions.
- Amplify your charitable deductions by donating stock or property that has appreciated, rather than cash. And you can get a double tax benefit if you’ve owned your property for more than one year, as you can deduct the property’s market value on the date of your gift and you avoid paying capital gains tax on the accumulated appreciation.
Please note that the old requirement that you only needed receipts for donated property up to $250 no longer applies. Each contribution must be accompanied by a receipt.
- Pay an estimated state income tax bill that isn’t due until January 15.
- Pay a property tax bill that isn’t due until early next year.
- Pay a doctor or hospital bill in this calendar year.
As often is the case, there is a caveat. And that is the Alternative Minimum Tax (AMT). In some cases, accelerating tax deductions can actually increase your tax bill—if you’re already in the alternative minimum tax or if you inadvertently trigger it.
The AMT is no longer just applied to the wealthy. Plenty of middle-class taxpayers are also feeling its effect. That’s especially true when it comes to state and local income taxes and property taxes, as they are not deductible under the AMT. So, if you expect to be subject to the AMT in 2021, don’t pay the installments that are due in January 2022 in December 2021.
If you are subject to the AMT, your AMT taxes will have to be figured separately from your regular tax liability. and with different rules. Then, you have to pay whichever tax bill is higher. Again, please consult your tax advisor.
Itemize if you can. Some 75% of folks don’t, and they may be missing out on some valid deductions. If you think it’s 50/50 whether you should itemize or not, consider bunching, which is simply timing expenses to produce lean and fat years. For example, when you have a big earnings year, you may want to collect as many deductible expenses as possible and deduct them that year. And the next year, you may not have as many deductions, so you won’t itemize for that tax reporting period.
Dump the losers in your investment portfolio. If you have stocks with losses—and you decide to cut your losses—now is the time! The losses will help offset any capital gains that you have. This is called “loss harvesting.” Losses offset gains dollar for dollar, and if your losses are more than your gains, you can use up to $3,000 of excess loss to reduce other income.
And if you have more than $3,000 in excess losses, you can carry them over to the next year. Lastly, if the $3,000 allotment exceeds your investment gains, you can use the remainder to offset up to $3,000 of other income. And in more good news, those losses can be carried over year by year—for as long as you live!
Contribute the maximum to retirement accounts. If you are an employee, the first place you will want to put retirement money is in your 401(k). That’s because, according to myubitquity.com, about 51% of companies who offer these plans match their employee’s contributions—to some extent. Let me tell you—that is free money, and you’re nuts if you pass that up!
Many of your contributions will be tax-deferred; they will compound over time; and as you can see from the following graphs, those payments to yourself will pile up very quickly over time.
According to the IRS, employee 401(k) contributions for 2021 are $19,500 with an additional $6,500 catch-up contribution allowed for those turning age 50 or older.
Once you’ve reached your contribution limits to your 401(k), the next step is to add to your IRA. Depending on whether you have a Roth or a traditional IRA, your contributions may be after-tax or deferred. For this year, contributions are limited to $6,000 ($7,000 if you’re age 50 or older), or if you’ve earned less than that, your taxable compensation for the year,
If you are self-employed, consider a Simplified Employee Pension Plan. For 2021, you can contribute up to 25% of compensation, or $58,000. Or for your 401(k), you can contribute up to an additional 25% of your net earnings from self-employment for total contributions of $58,000.
Please see irs.gov/retirement-plans/retirement-plans-for-self-employed-people for more details.
Avoid the Kiddie Tax (officially called Tax On A Child’s Investment And Other Unearned Income). In years past, parents found a good trick to shift the tax bill on their investment income from their high tax bracket to a child’s low bracket. Not anymore! Under the Kiddie Tax rule, the first $1,100 of a child’s unearned income qualifies for the standard deduction. The next $1,100 is taxed at the child’s income tax rate. A child (or young adult’s) unearned income beyond $2,200 is taxed at the parent’s normal tax bracket.
If the child is a full-time student who provides less than half of his or her support, the tax usually applies until the year the child turns age 24. One caveat: gifting stock to pay college expenses can backfire. If the appreciation sends the child’s unearned income above $2,200, your tax bill might be a lot higher than you bargained for.
Watch your flexible spending accounts. Flexible spending accounts, also called flex plans, are fringe benefits which many companies offer that let employees put part of their pay into a special account to pay childcare or medical bills. The money you deposited escapes both income and Social Security taxes. But if you don’t use it, you lose it. You may need to make some last-minute purchases to ensure the account is cleaned out.
Biden’s American Rescue Plan, the $1.9 trillion stimulus package, gives you extra child-care assistance through temporary changes to dependent-care FSAs. The plan boosted 2021 dependent-care FSA limits to $10,500 from $5,000, offering a higher tax break on top of existing rules allowing more time to spend the money—until December 31, 2022 for 2021 FSA money.
Use your estate tax exemption. Many people are worried that the $11.7 million lifetime estate and gift tax exemption ($23.4 million for a married couple) will decrease to $5 million, $3.5 million, or maybe go as low as $1 million. To take advantage of the current exemption, you might want to gift assets to your children or into a trust. If you make gifts under the current law, they will be grandfathered in, even if the exemption does decrease.
Right now, the law calls for an automatic decrease in the exemption to $5.49 million on January 1, 2026, unless Congress changes it.
Set up a 529 plan for your children’s education. If you have children under age 18, and especially under age 14, you can make tax-free contributions to a Section 529 qualified tuition plan. Unlike a Coverdell Educated Savings Account (CESA) there are no AGI limits on contributions to 529 plans. But distributions of earnings from a 529 plan are tax-free only if used to pay for higher education expenses (college and above).
Gifting. For 2021, you can gift $15,000 per person ($30,000 as husband and wife) to an unlimited number of individuals free of gift tax.
Increase your withholding. If you are facing a penalty for underpayment of federal estimated tax.
What to Expect in 2022
President Biden has proposed the American Families Plan for 2022. If enacted, this plan will increase the income taxes of high-income taxpayers, expand tax credits for low- and middle-income workers and provide funding for improved taxpayer compliance and service. Here’s how:
An increase in the top marginal income tax rate, from 37% to 39.6%. For next year, the rate would apply to taxable income in excess of $509,300 for married-filing-jointly taxpayers and $452,700 for unmarried taxpayers.
Expect an increase in tax rates for long term capital gains and qualified dividends. Under the budget proposals, long term capital gains and qualified dividends for taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, 39.6 % under the budget proposal.
Raising capital gains taxes on property transfers. Under the proposal, a donor or deceased owner of appreciated property would have to realize and pay a capital gains tax on the excess of the fair market value of the property over the taxpayer’s adjusted tax basis. Note that this would eliminate the step up in basis at date of death provisions contained in current IRS section 1014.
Increased self-employment tax and the net investment income tax—either a 3.8% self-employment tax or the 3.8% net investment income tax on all business income passed through to high income taxpayers for Partnerships, LLCs, and S corporations. The taxes would be imposed on adjusted gross income in excess of $400,000.
Increase for C corporation taxes. The rate would rise from 21% to 28%. For tax years beginning after January 1, 2021, and before January 1, 2022, the corporate income tax would be equal to 21% plus 7% times the portion of taxable income that occurs in 2022.
Large corporations with income more than $2 billion will pay a 15% minimum tax.
An increase in the employer-provided childcare tax credit to 50% of the first $1 million of qualified expenses.
A new Neighborhood Homes Investment Tax Credit. This would support investment in houses in neighborhoods where homes are in poor condition or have low property values.
Clean Energy Tax Credits. The proposal includes a number of new tax credits, including for Electricity Transmission Investments, and Tax Credits for Heavy and Medium-Duty Zero Emission Vehicles.
Gifts and transfers at death will be treated as income realization events. They will be treated as if the donor (1) sold the property, realizing any gain or loss; (2) repurchased the property; and (3) gifted identical replacement property, meaning any previously unrealized gain would be recognized by the donor and income taxes are paid on the “phantom” gain. Most transfers of appreciated property to and distributions from trusts (including most grantor trusts) would also trigger gain recognition.
But transfers of appreciated property to charity will not create a taxable capital gain. Additionally, each person could exclude $1 million of the phantom gain from recognition (a lifetime exclusion for gifts or transfers at death). Transfers to a surviving spouse at death would not trigger immediate gain recognition, but the surviving spouse would take a carryover basis in the transferred assets. That means the tax liability would be triggered at the surviving spouse’s death or sooner if gifted during life. This change is proposed to begin in 2022.
Stricter enforcement to “revitalize enforcement to make the wealthy pay what they owe” in an effort to shrink the tax gap, according to the Fact Sheet on the American Families Plan. We will see more audits of companies, executives, and the wealthy, due to stock compensation or founders’ stock. Expect the audit rates on those making over $1 million per year, which fell by 80% between 2011 and 2018, to accelerate. And financial institutions will have to report information on account flows so that earnings from investments, such as from stock compensation and company stock holdings, are subject to broader IRS reporting.
As you can see, the intent of the new proposal is to sock it to the wealthy. But if you look at the following graph, you can see that the wealthy do pay—on average—a higher tax rate.
Nevertheless, at this time, we don’t know how much—if any—of these proposed new taxes will materialize. But it never hurts to plan ahead, so you can begin to minimize the hurt.
And this would be the perfect time to discuss these possibilities with your tax expert.