The Week in Review: December 13, 2021
5 Tax Tips That Could Save You Money
An April 2020 Gallup poll found that 46% of Americans felt they paid too much in income taxes, while 48% believed the government’s take was about right.
Whatever your views on taxes may be, it’s probably fair to say that most Americans don’t want to pay more than they owe. It’s also probably fair to say that most Americans find little joy in pounding through the calculations each year.
Further, finding time during the holidays encourages procrastination. I get it. But a little of preparation before year-end may save you money when you file next year.
Here are five tax tips. Please reach out with any questions or consult with your tax advisor.
1. Contribute to a Roth IRA, traditional IRA, or health savings account. You have until April 15, 2022, to make a tax year 2021 contribution. A Roth gives you the potential to earn tax-free growth and allows for federal tax-free withdrawals if you meet certain requirements.
You may also be eligible to contribute to a traditional IRA, depending on your income and coverage under various retirement plans. If you qualify, the annual contribution limit for 2021 and 2022 is $6,000, or $7,000 if your age is 50 or older.
If your health plan allows for a health savings account (HSA), the annual limit on HSA contributions is $3,600 for self-only and $7,200 for family coverage.
Sources: IRS: Health Savings Accounts (HSA) and IRA Contribution Limits.
2. Donate to your favorite charity. If you itemize, you have until December 31 to claim a deduction to a qualified charity.
If you are 70 ½ or older, you may also take what’s called a QCD, or qualified taxable distribution. And it counts towards your RMD, or required minimum distribution.
A QCD is a taxable distribution from an IRA or inherited IRA that is paid directly from your IRA to a qualified charity.
In addition, in 2021, the IRS will allow most filers to deduct up to $600 for cash contributions (filing jointly), even if you don’t itemize. The limit is $300 for individual filers.
Sources: Fidelity: Using a QCD distribution; Schwab: Making Qualified Charitable Distributions (QCDs) and Naming Charitable Beneficiaries; IRS: Year-end giving reminder—Special tax deduction helps most people give up to $600 to charity, even if they don’t itemize.
3. About that RMD: A required minimum distribution is the minimum amount that must be withdrawn from most retirement accounts. If you reach age 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 72. In each subsequent year, the deadline is December 31.
While delaying the RMD until April 1 can reduce taxes in 2021, you’ll have two RMDs next year, which could push you into a higher tax bracket.
Sources: IRS: Retirement Plan and IRA Required Minimum Distributions FAQs.
4. Harvest tax losses. You have until December 31 to sell a security and take a tax loss and/or offset capital gains. If you are looking to offset gains or losses, be sure to pair long-term and short-term gains/losses.
However, do not run into the wash-sale rule (IRS Publication 550), which could disallow a capital loss. A wash sale occurs if you sell a security at a loss and, within 30 days before or after the sale, buy a "substantially identical" stock or security.
5. Be careful with mutual fund purchases near year-end. If you buy a mutual fund just before it distributes its annual dividend and capital gain, you will pay taxes on the entire distribution, even if you owned the shares for just one day.
It’s sometimes best to wait until after the fund has paid its annual distribution.
Source: Kiplinger: Don't Buy a Tax Bill with a Mutual Fund.
In the interest of brevity, the list is not all-inclusive. Other topics that may benefit you include college savings, the conversion of a traditional IRA into a Roth IRA, and donor-advised funds.
We also understand that tax laws and tax planning can be complex. While you may see benefits, be aware there are potential pitfalls, and we’d be happy to entertain any questions.
Two for the Road
1. Over the past century, global life expectancy has roughly doubled, to 72.6 years. In the United States, it rose from 39 years in 1860 to 53 in 1920 to 78.8 in 2019. A report by the World Economic Forum estimated that about half of babies born in the U.S. in 2007 will live to be 104. —The Week, November 27, 2021
2. Have you ever wondered why the abbreviation for a barrel of oil is BBL instead of BL? When the first oil well was drilled in 1859 oil was transported in barrels of various sizes. It then became common practice to use the 40-gallon whiskey barrels. However, this didn’t account for leakage during transportation, so the Standard Oil Company used 42-gallon barrels and painted them blue, guaranteeing a buyer that it was 42 gallons of oil. Thus, BBL originated as a symbol for “blue barrels.” —CNBC, April 22, 2020
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