‘Twas the Last Month of the Year and Tax Planning Is Here

Written by: Jennifer D. Foley, CPA – Wealth Advisor & Tax Planner

As the end of the year approaches and is filled with holiday distractions it is important not to forget year-end tax planning. In this article, I have provided some tips to help reduce your tax bill and potential changes to pay attention to going into 2022.

Areas of focus are:

  1. Gifting Strategies
  2. Retirement Contributions
  3. Passage of the Build Back Better Act


Gifting Strategies

Beginning in the tax year 2018 with the passage of the Tax Cuts and Jobs Act there was a doubling of the standard deduction. This along with the State and Local Tax Deduction (SALT) being limited to $10,000 some individuals did not see as much of a benefit to charitable giving.  One option this year could be to “bunch” or combine several years’ worth of charitable contributions into one year in order to exceed the standard deduction amount and receive the full itemized tax benefit for the contributions. If you’ve found yourself in an unusually high-income bracket this year another option could be to contribute to a Donor Advised Fund (DAF). A DAF is a fund that can be established in order to make donations to a public charity.  It allows for sizable donations to be made in one tax year then the grants can be made over many years in the future.

Another tax planning strategy that has long been utilized is gifting appreciated stock to charitable organizations. With another strong year on Wall Street, many investors have seen appreciation in their portfolios. Donations of appreciated securities can be a win-win for taxpayers. In addition to receiving a deduction for the full amount of the FMV of the security, the taxpayer also avoids income tax on the appreciation of the security.

For example, John Smith has $50,000 of capital gains of ABC stock in a taxable account. John typically donates $10,000 each year to charity. Instead, John makes 5 years’ worth of donations of the $50,000 appreciated stock to a qualified charity in 2021.  Not only has John bypassed the capital gains tax he would have paid he also receives $50,000 of a charitable contribution deduction.

However, unlike cash contributions which are deductible up to 100% of AGI in 2021, donations of appreciated stock are limited to 30% of AGI for 501( C ) (3) organizations and 20% to private foundations. Donations of appreciated securities can be useful in addition to tax planning, they can also help rebalance a portfolio.

For retirees who are expecting their income to increase due to Required Minimum Distributions from retirement accounts, the most tax-efficient way to donate would be through a Qualified Charitable Distribution. The taxpayer would request all or a portion of their RMD up to $100,000 to be directly donated to a qualified 501( C ) (3) organization.  The amount contributed would not be subject to any Federal ordinary income tax (the rules differ state by state.)  This is also beneficial for retirees who are trying to keep their income lower, so their Medicare premiums do not increase during RMD years.

Additionally, for 2021, non-itemizing couples may still deduct up to $600 in cash donations in addition to the standard deduction ($300 for individuals) to qualifying 501( C ) (3) organizations. Taxpayers who are interested in making non-charitable gifts to family members or friends may still gift up to $15,000 ($30,000 per couple) in cash or stock to each individual without gift tax implications.


Retirement Contributions

One top year-end tax planning strategy includes increasing contributions to employer sponsored retirement plans. These amounts can be taken out of one’s paycheck pre-tax, potentially lowering taxable income (if you are contributing to a Roth 401K these contributions would not be pre-tax but still important to contribute.)  If your employer matches contributions this will ensure you are not leaving free money on the table. The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively.

Contributions to Traditional and Roth Individual Retirement Accounts are allowed to be made after year-end but before your tax return is filed. The limits for 2021 are $6,000 ($7,000 if age 50 or older) or less depending on your taxable compensation for the year. Please see the chart below for additional changes for 2022:

1) This limit and catch-up limit also apply to Roth (after-tax) contributions under 401(K) and 403 (B) plans that permit such contributions.
2) In no event may annual additions exceed 100% of a participant’s compensation.
3) In no event may a participant’s annual benefit exceed 100% of the participant’s average compensation for the participant’s high three years.
4) Generally, an employee is considered “highly compensated” if the employee:

  • a)was a five-percent owner of the employer at any time during the current or preceding year; or
  • b)received compensation from the employer in the preceding year of more than the applicable dollar limit for that year.

5) This limit applies only to voluntary employee salary reduction (pre-tax) contributions.


Another hot topic for tax planning in 2021 is Roth conversions. In traditional IRA accounts, contributions are made with pre-tax dollars and the accounts are allowed to grow tax-deferred. However, withdrawals from these accounts are subject to ordinary income tax. In a Roth IRA, money is contributed after-tax, so qualified distributions are tax-free. A Roth IRA conversion is the transfer of retirement funds from a traditional IRA or 401K into a Roth. Since the funds come from tax-deferred accounts vs tax-exempt there will be tax due conversion. This is appealing for individuals who have a year with less income because the deferred income taxes must be paid at conversion.


Build Back Better Bill Passage

The US House of Representatives passed the Build Back Better Act on Friday, November 19, 2021. This bill is still awaiting passage in the Senate and the days are slipping by to become law by the end of the year. However, there are provisions taxpayers should be aware of that could affect year-end tax planning. One implication could be the elimination of a Roth conversion (explained above) for taxpayers making $400,000 a year or above. This includes distributions, transfers and contributions made after December 31, 2031.  Additionally, the bill prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA beginning December 31, 2021.

Another highly anticipated potential change could be an increase of SALT (State and Local Tax) deduction from the current cap of $10,000 to $80,000. This could be a windfall for taxpayers who previously itemized that live in high tax states or are high-income earners.

Also included in the bill is an amendment to IRS Code Section 1411 to increase the application of the Net Investment Income tax to income derived in the ordinary course of business to taxpayers with taxable income over $400,000/year.

There are many potential changes in this bill and the team at Bouchey Financial Group is keeping a close eye on its potential passage. Please feel free to reach out to us regarding your year-end tax planning questions.


Additional Resources:

  1. Year-End Tax Planning Checklist
  2. 3 Reasons Why You Should Consider a Roth Conversion
  3. Tax provisions in the Build Back Better act


Bouchey Financial Group is a fee-only, fiduciary, financial advisory firm with locations in Saratoga Springs & Troy, NY.

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