Look at your investment portfolio. You have lots of tax-savings opportunities in the coming months as the year’s end approaches. Consider getting rid of poor performers. Capital losses you incur can offset your capital gains plus up to $3,000 of other income. Any excess losses are carried forward and can help offset future gains. If you have capital loss carryforwards… Cull your portfolio for gains. Your net gains, up to the amount of the loss carryover, won’t be taxed.
See if you’re eligible for the 0% rate on long-term gains and qualified dividends. If taxable income other than long-term gains or dividends does not exceed $40,400 on single returns…$54,100 for heads of household and $80,800 for joint filers… then your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal rate until they push you over the threshold amounts.
Keep in mind these tax benefits that apply for 2021. Nonitemizers can write off up to $300 in charitable cash contributions as an above-the-line deduction on their 2021 Form 1040. This means filers can take the standard deduction and a deduction for up to $300 of cash donations paid to 501(c)(3) organizations. The ceiling is $600 for couples who file a joint return. The 60%-of-AGI limit on charitable gifts of cash by individuals is suspended. Gifts to donor-advised funds and private nonoperating foundations are excluded. This relief applies to charitable cash contributions that you make this year and elect to deduct on Schedule A of the 1040. Carryovers of excess donations from prior years don’t get the break. This easing also applied to 2020 returns.
Taking too large a retirement plan loan can trigger a taxable distribution. Plan loans are tax-free if the total doesn’t exceed the smaller of $50,000 or 50% of the loan balance. (Under the coronavirus relief legislation, these figures are $100,000 and 100% for loans taken out from March 27 through Sept. 22, 2020.) Participant loans more than these amounts are treated as taxable distributions. Defaulting on a participant plan loan can also result in taxable income. The maximum repayment period for nonresidential plan loans is generally five years. Loans used to buy or construct a principal home can be paid back over a longer time. In general, loan payments must be made quarterly or more often, with payments of substantially the same amount. If the participant fails to pay an installment and doesn’t do so by the end of the following quarter, then any unpaid loan amount, plus accrued interest, is treated as a deemed distribution to the participant. Make sure to obey the rules. Participant loans are a frequent IRS audit issue.
Most people will benefit using this strategy: Accelerate deductions to this year… And defer income to 2022, with the goal of cutting your combined taxes for 2021 and 2022. Itemizers have flexibility in shifting write-offs. For example, making your Jan. 2022 mortgage payment on your home before year-end will allow you to deduct the interest portion on Schedule A of your 2021 return. Make the most of your generosity when donating to charitable organizations. Contribute appreciated property, such as stocks or shares in mutual funds. If you’ve owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation. Don’t donate assets that have dropped in value. If you do, the loss is wasted. Donate cash to make use of two rules that apply for 2021: Nonitemizers can deduct up to $300…$600 for joint filers…of their charitable cash contributions. Also, the 60%-of-AGI limit on charitable cash gifts by individuals is suspended. Use your annual gift tax exclusion. You can give up to $15,000 to each person this year without paying gift tax or tapping your lifetime estate-and-gift-tax exemption. Your spouse can also give $15,000. Say you’re married with four kids and six grandkids. You can give each relative up to $30,000 ($300,000 total) this year in excludable gifts. Annual gifts over the exclusion amount will trigger filing of a gift tax return for 2021, but no gift tax will be due unless your total lifetime gifts exceed $11,700,000.
Pay attention to the required minimum distribution rules for traditional IRAs. Individuals 72 and older must take annual withdrawals or pay a 50% penalty. The same rules apply to 401(k)s and similar workplace retirement plans… With two exceptions: First, people who work past 72 can delay RMDs from their current employer’s 401(k) until they retire, provided they own no more than 5% of the firm that employs them. Second, for people with multiple 401(k)s, 403(b)s and the like, the required minimum distribution must be taken from each account.
If 2021 is your first RMD year, you have until April 1, 2022, to take the RMD. The distribution will still be based on your total IRA balance as of Dec. 31, 2020.
Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $100,000 yearly from IRAs directly to charity. Qualified charitable distributions can count as RMDs, but they are not taxable and they are not added to your AGI and won’t trigger a Medicare premium surcharge
Many key dollar limits on retirement plans will be higher in 2022. The maximum 401(k) contribution rises to $20,500. People born before 1973 can contribute an extra $6,500. These limits also apply to 403(b) and 457 plans. The cap on SIMPLEs ticks up to $14,000. People 50 and up can put in $3,000 more. The 2022 payin cap for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals aged 50 and older. But the income ceilings on Roth IRA payins go up. Contributions phase out at AGIs of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles. Also, deduction phaseouts for traditional IRAs start at higher levels, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers. If only one spouse is covered by a plan, the phaseout for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000.