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Year-End Tax Planning Checklist: What to Look For Before December 31st

November 16, 2021 | By Matthew Gordon, CFP®, RLP®

As 2021 draws to a close, it’s a good time to make sure that your tax planning is set. To help minimize your tax payments over time, there are several items that should be completed before December 31st. In this article, we’ll cover the 10 critical areas you should focus on for your year-end tax checklist.

Tax laws are always subject to change. At Wealthstream Advisors, we collaborate with your accountant to help guide you.

Start With Tax Projections

A thorough tax projection can help you avoid some surprises on April 15th. Start by reviewing last year’s return and consider what has changed for the current year, and consult our Year-End Tax Planning Letter for a list of important questions you’ll want to answer. Depending on your answers, it may help to accelerate or delay certain deductions and income items.

Consider Your Retirement Plan

If you’re saving for retirement, now’s a good time to think about maximizing your 401k and IRA contributions. If you don’t have a retirement plan with your company, you can consider establishing and funding one. Previously, the deadline for employers to set up most retirement plans was December 31st. Under the SECURE Act of 2019, the deadline for an employer to establish a retirement plan has been extended until the tax filing deadline for the business (including extensions). See our letter for a list of questions to answer regarding your retirement plan.

Decide if You Want to Do a Roth Conversion

Take a moment to look ahead toward retirement. Do you see yourself in a higher tax bracket in retirement than the one you’re in now? If so, you might want to consider converting a portion of tax-deferred dollars from Traditional IRA to dollars that grow tax-free in a Roth IRA.

Contribute to Your Health Savings Account

Health Savings Accounts (HSAs) are savings accounts for medical expenses. There are a few ways HSAs can have a positive effect on your taxes. First, contributions you make to an HSA are tax-deductible. Any earnings within your HSA are tax free and withdrawals are tax exempt as long as the funds are used for qualified medical expenses.

Tally Your Medical Expenses

You should calculate the amount of medical expenses you’ve incurred over the year. Some qualified medical expenses are tax-deductible. If you’ve made any out-of-pocket healthcare payments in 2021, find out if you’re eligible for tax relief. Determine whether you have money in a flexible spending account still to be used this year and refer to our checklist for additional important questions.

Look Into Gifting to Heirs

Gifting can be advantageous to transfer wealth and ultimately potentially reduce the amount of estate and income taxes owed. The annual exclusion for gift taxes in 2021 is $15,000. 

Tax Benefits From 529 Plans

529 plans are flexible, tax-advantaged savings accounts primarily for college savings. They can be used for a variety of things beyond just paying for college tuition. Withdrawals from 529 plans are often federal and state tax-free. Some states offer a state tax deduction on contributions up to certain limits.

Charitable Giving

There are multiple ways to get tax benefits by giving to charities. Some are more tax-efficient than others. Asking these important questions from our Year-End Tax Planning Letter can provide some clarity.

Investment Portfolio

When it comes to your investment portfolio, one of the tax considerations is how to manage the recognition of capital gains and losses. Looking into whether certain unrealized losses can and should be taken can help your tax situation.

Factor in Any Residency Changes 

Last year, we hosted a webinar focused on NY domicile and residency issues. While the discussion mostly concerned NY tax law, it addresses concepts that apply across many states. If your living or working situation changed this year, you may want to be aware of certain state income tax opportunities and traps. There’s a wealth of information in the hour-long presentation. Watch here.

Conclusion

Tax rates and laws frequently change. For example, the SECURE and CARES Acts have brought significant changes to tax strategies surrounding retirement. Even so, sound planning may help you secure a better outcome for your taxes. To help you get a head start on these important steps, we created our thorough Year-End Tax Planning Letter. Download it here to and stay ahead of deadlines and any surprises that might arise by April 15.

 

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