2021 Mid-Year Individual Tax Planning Checklist

2021 Mid-Year Individual Tax Planning Checklist

By Shana Francis, CPA, Tax Manager | Family, Executive, Entrepreneur & Advisory Services Team

Individual Tax Planning and Savings Strategies

Why put off until December, what you can do today? As we approach mid-year, it’s never too early to consider planning strategies for the year that may help lower your tax bill. Review the below list to see if there are steps you can take now to reduce your 2021 tax bill.

Review your latest paystub

  • Maximize your 401(k) deferral

    Make sure you are on track so that your 401(k) contributions will be maxed out by year end. The 2021 contribution limit is $19,500, with an additional $6,500 catch-up contribution if you are 50 or older. If you turn 50 during 2021, make sure your payroll department is allowing for the additional contributions.

    • Also consider whether contributions to a ROTH 401(k) would be more beneficial. This would cause your current contribution to be after tax (resulting in higher, not lower) taxes. As such, we suggest that you consult with your financial advisor before making such a change to see how this strategy may help over the long term.
  • Health Savings Account

    Make sure you are on track to maximize your HSA contributions by year end. The 2021 maximum contribution is $3,600 for individual plans and $7,200 for family plans. If you are 55 or older, you can contribute an additional $1,000 catch-up contribution.

    • If possible, try not to spend the dollars saved in the HSA account as this account can be used like another tax deferred retirement account and provide for future tax free withdrawals.

Plan for IRA Distributions
The CARES Act waived Required Minimum Distribution (RMD) requirements for 2020 only. So, be sure to take your 2021 RMD before year end, including required distributions from inherited IRAs.  If you are over 70 1/2, consider making Qualified Charitable Distributions from your IRA directly to public charities to satisfy your RMD requirements (up to $100,000 per taxpayer).

    • Reminder to review the RMD age requirements as the SECURE Act (passed in December 2019) increased the RMD age to 72 for those not already required to take RMDs in 2019 as a result of reaching age 70 1/2.

Monitor Investment Portfolio

Work with your investment advisor to monitor the markets and harvest tax losses to offset capital gains if it makes sense considering your overall investment strategy.

    • Alternatively, consult your financial advisor to determine if it is appropriate to take gains given strong market performance to date and the possibility of higher capital gain rates in the future.

Real Estate Sales

The real estate market is hot! Which means many sellers will be realizing large gains on the sale of their homes. Remember, if you sell your home, and it has been your primary residence for two of the last five years, single filers can exclude gains up to $250,000 and joint filers up to $500,000. So, it is very important to keep detailed records to support your tax basis in the home. This would include purchase documents, detailed listing of capital improvements (and receipts) as well as all selling expenses.

Monitor Business Income/Deductions

While no one can predict the future, many believe that tax rates will be increasing next year (as of January 1, 2022). If we do see an increase in tax rates for 2022, consider accelerating income into 2021 and deferring deductions to 2022. Keep in touch with your Keiter advisor as more detailed legislation is introduced in the coming weeks and months.

Contribute to 529 Plans

Consider funding 529 plans for high school and college savings. If you fund a Virginia 529 plan, you can deduct $4,000 per account, per taxpayer on your Virginia return. For taxpayers over 70, no deduction limitations apply.

    • Remember, you can also use up to $10,000 per year from the plan towards the beneficiary’s private or religious K-12 tuition.

Plan for Charitable Contributions
In 2021, taxpayers who take the standard deduction are also able to deduct up to $300 of cash charitable contributions ($600 for a joint return). And, similar to 2020, taxpayers can deduct cash charitable contributions in tax year 2021 up to 100% of their adjusted gross income. Please note the 100% limitation does not apply to cash donations made to donor advised funds or private foundations. Taxpayers should also still consider bunching charitable gifts to get the benefit of itemizing in one year and taking the standard deduction in another and/or donating appreciated stock rather than cash.

Tax Credits

Consider federal and state tax credits available to you to offset your taxes

    • Residential Energy Credits (federal credit) – Good news for those taxpayers who have been contemplating installing solar panels or geothermal heat pumps – In December 2020, Congress extended the tax credit for cost of installation of solar electric property as well as geothermal heat pumps, previously set to expire at the end of 2021. For certain energy efficient property placed in service from 2021-2022, taxpayers can take a 26% tax credit and for property placed in service from 2022-2024, taxpayers can take a 24% tax credit. The credit is set to expire at the end of 2024, unless Congress acts to extend the credit again.
    • Virginia Credits: Virginia offers many and varied tax credits to incentivize funding of certain charities and businesses. Some of these charitable credits include Neighborhood Assistance Credits (NAP) and Education Improvement Scholarships. Some of the more common Virginia credits for businesses include R&D Credits and Qualified Equity & Subordinated Debt Investment Credits. Review the Virginia tax website to see if any other specific credits could benefit you.

Business Tax Planning Considerations for Sole Proprietors, LLCs, and S Corps

This listing focuses on individual planning strategies, but many taxpayers include business income (or loss) on their individual filing as a result of sole proprietorship, Single Member LLC, Multi-Member LLC or S Corporation ownership. Please consider the results of these income sources (and specific planning strategies for businesses) when implementing the above.

There are many different strategies (or combination of strategies) to help reduce current income tax. The specific categories of your income (capital or investment income vs ordinary) can have a major impact as well as consideration of future income and long term goals. If you have any questions about the above information or are not sure if certain items apply to your tax situation, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000 to discuss in more detail.

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About the Author

Shana has 15 years of experience in public accounting, specializing in providing tax compliance and consulting services to high net worth individuals, including corporate executives and entrepreneurs. Her areas of expertise include income, gift, and trust and estate compliance and planning services. She is a member of the Firm’s Family & Executive Advisory Services team.

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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