2021 Year-End Tax Planning Strategies

by Glenn Venturino, CPA, and James Lange, CPA/Attorney


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.
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.

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.

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.

To read the remainder of our year-end tax planning strategies, please go to our website at https://PayTaxesLater.com/2021YearEnd.

If you would like a free copy of my book, The IRA and Retirement Plan Owner’s Guide to Beating the New Death Tax, simply call Edie Britton at 412-521-2732.