Year End Tax Plan

 It’s time to review your year-end tax plans, now that we think individual federal income tax rates aren’t going up next year, except possibly for taxpayers with modified adjusted gross incomes over $10 million. We also don’t expect changes to the estate tax rate or the stepped-up basis rules for inherited property. 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. Do not 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: Non itemizers 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. 

Boost your federal income tax withholding if you expect to owe tax for 2021. It can help avoid an underpayment penalty. You’re off the hook for the fine if you prepay, via tax payments or withholding, at least 90% of your 2021 total tax bill or 100% of what you owed for 2020 (110% if your 2020 AGI exceeded $150,000). You can give your employer a new W-4 to have more tax taken from wages. IRA owners taking RMDs can use this income tax withholding strategy: Have more tax withheld from a year-end distribution from your traditional IRA. Tax withheld at any point in the year is treated as if evenly paid throughout the year. Do not forget about the 0.9% Medicare surtax on earned income. It kicks in for singles and household heads with earnings over $200,000…$250,000 for joint filers. Employers must begin to withhold the tax from worker paychecks in the period when wages first exceed $200,000, regardless of the employee’s marital status. This can lead to under-withholding for a couple if each spouse earns under $200,000, but their combined wages total more than $250,000. The same goes for an employee with a self-employed spouse if the couple’s combined earnings will exceed $250,000.

Pay attention to the required minimum distribution rules for traditional IRAs. Individuals 72 and older must take annual withdrawals or pay a 50% penalty. To arrive at the 2021 RMD amount, start with your IRA balances as of Dec. 31, 2020, and use the tables in IRS Pub. 590-B. The amounts can be taken from any IRA you pick. 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. If you opt to defer your first RMD to 2022, you will be taxed in 2022 on two payouts: The one for 2021 that you deferred and the RMD for 2022. This doubling up would hike your 2022 income and could push you into a higher income tax bracket. 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. Retirement plan contributions can be based on up to $305,000 of salary. The pay in limitation for defined-contribution plans increases to $61,000. Anyone making over $135,000 is highly paid for plan discrimination tests. The 2022 pay in cap for traditional IRAs and Roth IRAs remains $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older. But the income ceilings on Roth IRA pay-ins 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. More low-income retirement savers will qualify for the savers’ credit in 2022. The break is for certain individuals who stash money in an IRA, 401(k), 403(b), SEP or similar retirement plan. The maximum saver’s credit of $2,000 for joint filers and $1,000 for others is capped at 50%, 20% or 10% of contributions, depending on AGI. For 2022, it fully phases out at AGIs over $34,000 for single filers, $51,000 for heads of household and $68,000 for married couples filing jointly. 

Retirees rehired by their former employers won’t disqualify a pension plan, the Service reminds employers. A rehire because of unforeseen circumstances, such as the coronavirus pandemic, won’t jeopardize the bona fide retirement status of the individual’s former retirement. So, for example, public school districts seeking to address urgent hiring needs can rehire former teachers and other staff who have retired and have begun receiving pension benefits. Also, if the plan permits, those employees may continue receiving the benefits even after they are rehired. There’s also this pension rule to help keep older workers on the job: Employees who are at least age 59½ or the plan’s normal retirement age can continue to work for the employer and receive in-service pension benefits.