Table of Contents

Lead Article for December 2021 Lange Report

If you haven’t already done so, now is a good time to start thinking about cutting this year’s taxes and/or considering whether you should make a Roth IRA conversion. Let us look at some tax-planning considerations that can help lower your 2021 tax bill or reduce future taxes beyond 2021.

As a reminder, if you qualify and have not received your 2021 stimulus check, it can be claimed as a recovery rebate credit on your 2021 tax return.

For 2021 year-end tax planning purposes, once again we highly recommend that taxpayers who have yet to implement Roth conversions in 2021 consider doing so. In the right situation, strategic Roth conversion planning can utilize incremental tax costs while also providing a tax-free retirement nest egg account. Please read Chapter 6 of our book, The IRA and Retirement Plan Owner’s Guide to Beating the New Death Tax, which describes Roth IRA conversions after the passing of the SECURE Act.

Making Roth conversions used to be an “offensive strategy” meaning you would likely get a great result for your family if you made the appropriate Roth IRA conversions. Today, with the SECURE Act, we are recommending Roth conversions for many clients as a “defensive strategy.” That is, you and your family might suffer horrendous consequences by not doing Roth conversions. Some of those draconian consequences could be avoided or at least reduced by doing the appropriate Roth IRA conversion.

Please feel free to watch our recent Roth IRA conversion workshop available at https://PayTaxesLater.com/roth-workshop.

Please also read our article that received over 175,000 views on Forbes.com at https://www.forbes.com/sites/jlange/2020/03/30/now-is-the-best-time-in-history-to-do-a-roth-ira-conversion/?sh=3625c242f1ba.

In the continuing effort to offset COVID-19 financial hardships to American taxpayers, in March 2021, The American Rescue Act was signed into law and some of the provisions are highlighted.

The Tax Cuts and Jobs Act (TCJA) brought significant tax reform changes for both individuals and businesses that are relevant now. Many of the new changes that took place in 2018 were anything but simple. One change that affected millions of taxpayers was the elimination or drastic reduction of certain itemized deductions on Schedule A.

Nearly 90% of taxpayers utilize the standard deduction in lieu of itemizing their tax deductions since the law change took place. While this change did simplify the tax return filing for many, there are still plenty of tax-savvy ideas to consider. With many taxpayers no longer itemizing deductions, the additional focus should shift to Adjusted Gross Income (AGI) tax planning. Reducing your AGI can increase tax deductions, increase certain tax credits, and reduce exposure to other taxes.

Itemized Deductions:  We have a higher standard deduction allowance in 2021 ($12,550 for individuals, $14,250 if 65 or over, $25,100 for married filing jointly, $27,800 if 65 or over). There are also significant limitations on what we may include for itemized deductions. For those taxpayers who typically never itemized their deductions, the increase in the standard deduction is welcome. For itemizers, particularly if you pay high real estate taxes and state and local income taxes, the change in itemized deductions generally hurt you.

Gaming the Standard Deduction Allowance Vs. Itemizing Deductions

Bunching Strategy:  Bunching your itemized deductions is a technique that involves accumulating deductions, so they are high in one year and low in the following year. You can benefit from the “bunching” strategy. It’s very typical for most taxpayers to wait until tax time to add up everything and use the higher the standard deduction or their itemized deductions. It should be easier for most taxpayers to project their total itemized deductions before the end of 2021 due to the elimination of certain itemized deductions and limitations on others [State and Local Tax (SALT) deduction]. By being proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year while using the standard deduction the following year.

Bunching Charitable Donations:  Consider bunching charitable donations every other year while taking the standard deduction in the off years.

A popular vehicle for maximizing your charitable donations is the use of a Donor-Advised Fund (DAF). The DAF functions as a conduit. The taxpayer gets an immediate tax deduction up to certain limits when the money is directed into the fund. The donor decides what charities will receive the money and when it shall be paid out. In a high-income year, front-loading the fund with a larger contribution can be quite nice. By the way, the assets within the fund also enjoy tax-free growth. Please note that the 100% of AGI charitable contribution limit for 2021 does not apply to DAFs.

We have found that charities are very active with their solicitations during the holiday season and would be happy to receive gifts near year-end or early in the new year. If it appears that you think you will be itemizing your deductions in 2021, but not next year, consider making last-minute cash and non-cash charity donations before year-end. If you do not have the extra cash available today, you can use a credit card before year-end and still qualify for a 2021 tax deduction. If the gift is appreciated stock, the tax benefits are even greater.

Also, you don’t necessarily have to donate cash. You may consider the gift of highly appreciated stock that could avoid capital gains treatment. You could also consider non-cash contributions of “stuff” to the appropriate charity?

We often like to recommend a Roth IRA conversion strategy for those taxpayers who have already or are still planning to make a large charitable contribution before year-end.

In one case, a parent was planning a large gift to a child. The child, who is in a much lower bracket, was planning to make a large gift to a charity and would not have received much tax benefit. The father was planning to give to the child a gift. Instead, we had the father make that gift directly to the child’s charity. The father got a large tax deduction and with that tax deduction, we did a big Roth IRA conversion for the parents the same year as the contribution. That was fun because in effect we compounded the tax benefit of the charitable contribution potentially saving the family hundreds of thousands of dollars in taxes in the long run.

Changes in 2021 Child Tax Credit:  The American Rescue Plan act expands the Sec. 24 child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and includes 17-year-olds eligible as qualifying children.

The increased credit amount is $3,000 per child ($3,600 for children under 6) for eligible taxpayers. The maximum credit amount gradually phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.

The IRS was directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

The IRS set up an online portal to allow taxpayers to opt-out of advance payments or provide information that would be relevant to modifying the amount.

Taxpayers, in general, will have to reconcile the advance payment amount with the actual credit amount on next year’s return. There will undoubtedly be many surprises when this happens on the 2021 tax return. Many taxpayers who are used to receiving large refunds may either receive a much smaller amount or even owe money this year.

Changes in 2021 Child and Dependent Care Credit:  The act makes various changes to the Sec. 21 child and dependent care credit, effective for 2021 only, although I wouldn’t be at all surprised to see this change become more permanent. The credit will be worth 50% (formerly 35%) of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for multiple children. These amounts are a significant increase. The maximum credit reduction will start at household income levels over $125,000 and be reduced to 20% when AGI reached $185,000. For households with income over $400,000, the credit can be reduced below 20% and eliminated when AGI reaches $440,000. The credit is now refundable for taxpayers who do not have an offsetting tax liability.

Dependent Care Flexible Spending Account limits were also increased in 2021. The new limit is $10,500 for individuals or married couples filing jointly. You will need to check with your employer to see if they are participating in the increased limits.

This is not an either/or decision. Typically, most Flexible Spending Accounts decisions are made a few months prior to the start of the new year. When the limits changed in March 2021, many participants may have been unaware or not notified of the increased funding limits changes. If your 2021 Flexible Spending Account was set up using the lower limits, all is not lost. The excess out-of-pocket expenses that you incurred may qualify you for additional tax credits on your 2021 tax return.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Changes in 2021 Lifetime Learning Credits Limits: The Taxpayer Certainty and Disaster Relief Act of 2020 permanently modified the Lifetime Learning Credits. Specifically, to be on equal footing with the American Opportunity Tax Credit, the law increased the statutory income level and the range over which the credit is phased out. The previous lower levels are increased to $80,000-$90,000 for single taxpayers and $160,000-$180,000 for married joint filers. The Lifetime Learning Credits are available for undergraduate, graduate and job skill courses. This change is quite welcome considering the high cost of education.

Taxpayer Certainty and Disaster Tax Relief Act of 2020:  The Taxpayer Certainty and Disaster Relief Act of 2020, enacted last December provided several provisions to help individuals and businesses who give to charity. The new law generally extends temporary changes included in the CARES Act. Once again, this deduction is available to taxpayers who will not be itemizing their tax deductions. The deduction remains at $300 per tax return for single taxpayers ($150 for married taxpayers filing separately). The deduction is increased to $600 for married individuals filing joint tax returns. The payment must be in cash (or cash equivalent) to a 501(c)(3) public charity. 

100% Limit on Eligible Cash Contributions:  The 2020 provision for “Increased Individual Limit” extends to the tax year 2021. The taxpayer (s) may donate up to 100% of their AGI if the taxpayer has made the proper election to do so. Taxpayers can also designate which donations are subject to the 60% of AGI limits and which ones are subject to 100% of AGI limits. On the surface, making charitable donations up to 100% of your AGI would seem appealing, after all, zero taxable income and paying zero tax sounds great. However, a closer look reveals that reducing your AGI all the way to zero taxable income generates tax savings at the lowest tax brackets. Higher-income taxpayers may adopt an alternative approach. Target the amount of your charitable giving by using up the higher tax brackets and pay taxes on the remaining income in the 12% or 10% tax bracket. Also, if a taxpayer contributes 100% of their AGI with a charitable donation, they will receive no tax benefit from their other Schedule A, itemized deductions.

One planning technique that may be more advantageous in 2021 and beyond is the use of Qualified Charitable Distributions (QCDs) for taxpayers who are 70 and ½ or older. See the section titled Charitable Giving for details on using this strategy.

A Helpful Tip:  If you are currently using QCDs, please make sure you receive acknowledge letters from the charitable organizations for any single donation of $250 or more before filing your tax return. The IRS requires the letter under the Substantiation and Disclosure requirements for the donation to be tax-deductible.

Alert:  If you are subject to 2022 RMD rules and your pension income is entirely from qualified plans such as 403(b)s and 401(k)s, you should consider an IRA rollover or partial rollover before December 31, 2021. This will enable you to take advantage of QCDs as part of your 2022 RMD.

Caution: For those seniors still working and doing back door Roth conversions, an IRA rollover would taint the intended benefit of the back door strategy.

You can read the remainder of this article on our website at:

https://PayTaxesLater.com/2021YearEnd

 

The 7 Habits of Highly Effective People

by James Lange, CPA/Attorney

Last month I wrote about reinforcing good habits by finding ways to support the “Ability Chain” referred to by B.J. Fogg in his book, Tiny Habits: The Small Changes that Change Everything. The links in the Ability Chain are time, money, physical effort, mental effort, and routines. And the chain “is only as strong as its weakest link.” Basically, the objective is to reduce the burden of each link—for instance, how much mental/physical, etc. effort it takes to adhere to the new habit—so the habit doesn’t become derailed by obstacles. And the best way to do that is to find ways to put the habit on autopilot, as I do with my meals that are prepped and provided by my personal chef, Lauri Lang.

Stephen Covey, who has since passed, sold 40 million copies of The 7 Habits of Highly Effective People, and for good reason. He identifies some of the good habits we all should work on. Add some of the strategies from B.J. Fogg for making habits stick and you have a winning combination!

Covey identifies the following seven habits:

  1. Be proactive
  2. Begin with the end in mind
  3. Put first things first
  4. Think win-win
  5. Seek first to understand, then to be understood
  6. Synergize
  7. Sharpen the saw

Wikipedia offers a good discussion of the book if you are interested.

My Habits (Good and Bad) and Resolutions

Given that we are approaching the end of the year and the season for making resolutions, I want to offer you a view of a few of the “habits” that I am evaluating.

  • I take a slew of supplements twice a day.

Though I have a generally healthy diet packed with nutritious food, I believe the supplements help. Though I am obviously not an expert, I will mention some of the supplements that I take that are likely useful for a lot of people: Vitamin A, a probiotic, fish oil, and turmeric. Every three weeks, I fill up pillboxes with all the supplements I just mentioned and many more. I am in the habit of taking them in the morning and in the evening. I believe that they have improved my health and have prevented problems that I would likely otherwise have.

  • I attempt to do one thing at a time.

Of course, there are always unavoidable interruptions and the need to multi-task. That said, I think multi-tasking is something to be avoided. For example, when I work, I don’t have the radio, TV, music, or anything else on.

· I get injections of Mesenchymal stem cells every year to treat my psoriatic arthritis.

I still use the more traditional treatment, but I think getting both is even more effective. I get treated both locally and systemically at a facility in Salt Lake City, UT. I have fewer symptoms now than I did 30 years ago. Diet, exercise, and western medicine are all extremely helpful, but I believe stem cells are as well. Currently, I don’t have many symptoms, but I am still going (which is both inconvenient and expensive) because I think getting stem cell injections regularly is one of the keys to success.

  • I put on sunscreen every time I go outside for more than a couple of minutes.

I don’t care if it is cloudy and cold, I apply sunscreen to all exposed parts of my body. I take extra sunscreen with me and if I am out for a long time in the sun, I will re-apply at some point during the day.

  • I continue to be a life-long learner.

I usually listen to some business or marketing digital file while driving. Many years ago, I heard Zig Ziglar recommend attending Automobile University. In other words, listen to something useful while driving. If it is music, I listen to some of the greatest classical music compositions ever recorded.

  • I consume way more Stevia than I should.

Right or wrong, I don’t believe it is as harmful as some of the other artificial sweeteners. That said, I know drinking water would be much better. That would be a great habit to get back into. In fact, drinking nothing but water would be a great habit. I also drink coconut water which tastes good and only has 60 calories per serving. It would be better to follow Dr. Mark Hyman’s advice: don’t drink your calories.

Resolved: Drink a large glass of water every morning as soon as I get up. (Check back with me in six months.)

  • I go to sleep in total darkness. 

I have heavy blinds in the room that blocks out all light and most noises. I have a charging station downstairs for my cell phone, watch, etc. to remove all those lights at bedtime. I try to go to sleep at roughly 10 p.m., but frankly have more work to do in that area. If I wake up during the night, I check the time and if it is less than 7 hours after I went to bed, I go back to bed without reading, checking my cell phone, or interacting with any screens. By the way, my Facebook account was hacked, and I couldn’t access it for about a month. I realized I wasn’t missing much, and now don’t check Facebook at all.

Resolved: Work on reducing obstacles to get to bed by 10 p.m. bedtime.

What are some of the resolutions you are looking to turn into habits? If we get some responses, we will post them in the January newsletter. Remember also, and this is advice from the November newsletter, keep your resolutions manageable and potentially achievable—don’t set out to change the world, just the path that you are on.