ARI BAUM, CFP®
HAVE YOU BEEN MAKING GOOD USE OF THE RECENT TAX CODE CHANGES TO LEGALLY REDUCE THE AMOUNT OF TAXES THAT YOU PAY EACH YEAR? MANY AMERICANS PAID LESS DUE TO CHANGES IN MARGINAL TAX BRACKETS AND OTHER REVISIONS. HOWEVER, SOME OF THE TAX CODE CHANGES ARE SCHEDULED TO EXPIRE IN 2025, AND IT’S ENTIRELY POSSIBLE THAT THEY WILL DISAPPEAR BEFORE THEN.
In other words, there is potentially an extremely limited opportunity to leverage current laws. The 2021 tax year may be the last chance to take advantage of these rules.
With such a limited amount of time, it’s important to act quickly. It’s reasonable to assume that the tax environment will be less favorable going forward, so locking the advantages in while you still can is critical.
Some of these hidden possibilities are more urgent than others, because you may need to make adjustments before December 31 to maximize them. Not all are available on a fiscal basis or can be delayed until you file. Make sure that you don’t lose the chance to benefit by running out of time to make decisions.
The current tax rates might be the lowest you’ll see for the rest of your life, and I want you to make the most of them. All of the following options are actions you can take right now to potentially lower your taxes this year and in the years to come. I strongly recommend that you take this list, along with your tax return, to your CPA and financial professional to see which tax reduction opportunities offer you the most benefit. If seizing these opportunities sounds good to you, keep reading.
HIDDEN OPPORTUNITY 1
BUNDLE UP!
Recent tax changes nearly doubled the standard deduction and did away with many write-offs, removing the tax benefit of itemizing deductions for many taxpayers. Given that the tax laws could be very different for the 2022 tax year, 2021 is a good time to optimize your deductions by “bunching” them to get over the standard deduction threshold. You can then take the standard deduction the following year—potentially maximizing your tax savings multiple years in a row.
For example, if your property taxes for 2022 are assessed in 2021, pay them in 2021 and take the deduction this year, too. In addition, you can make several years of charitable contributions this year, instead of making your usual annual contributions.
Do you have major medical-related expenses coming up? Potentially maximize your tax deduction by prepaying your out-of-pocket medical expenses for the year to help rise above the standard deduction amount. Make sure you bundle enough to meet the 7.5% AGI threshold for medical expenses. You might even get a discount for paying up front!
What kind of medical expenses qualify? A surprising number, including unreimbursed doctor fees, long-term care premiums, certain Medicare plans, and some home modifications such as wheelchair access.
HIDDEN OPPORTUNITY 2
CHARITY BEGINS AT YOUR IRA
Although 72 is now the age where you must start your required minimum distributions from your pre-tax retirement accounts, you still have the right to make Qualified Charitable Distributions (QCDs) directly from your IRA to a qualifying charity once you’re 70½.
The QCD allows you to exclude up to $100,000 from your gross income (with certain restrictions). You benefit from the tax reduction at the same time as you provide money to a cause that’s near and dear to you. It’s not clear what the fate of the QCD will be in the future, so act now to make sure that you take advantage of it while you still can.
HIDDEN OPPORTUNITY 3
CONVERT IN MODERATION
A Roth conversion is a great way to permanently lower your taxable income in retirement. It allows you to convert tax-deferred assets into tax-free assets and pay taxes on the conversion in an optimal tax year. Depending on changes in tax legislation, future tax brackets are unlikely to be as low as they are today. Converting some of your pre-tax money in 2021 not only allows you to lock in today’s beneficial bracket, but also to reduce the amount of money subject to Required Minimum Distributions in the future.
If the current brackets don’t expire until 2025, you can potentially continue to convert each year. If laws change, however, this could be the last year that a Roth conversion makes sense—especially if you’re still working. Convert only a bit at a time, so that you don’t accidentally push yourself into a higher tax bracket by converting too much.
The days when you could reverse a Roth conversion (called recharacterization) and eliminate the tax bill are gone, meaning once you convert that Traditional IRA to a Roth, you don’t get a do-over. So you really have to look at all the variables and pick the right time for the move.
HIDDEN OPPORTUNITY 4
OPTIMIZE INVESTMENT FEES
An itemized deduction that’s no longer available for American taxpayers is the one on investment fees, which often covered assets under management. Yet there’s still a way to pay fees with pre-tax dollars if they make sense in light of your overall financial goals and investment performance.
Qualified retirement accounts are permitted to pay their own expenses. Although many investors may not have been aware of this, the IRS allows for pre-tax money to be pulled from the applicable account.
Paying for advice fees with pre-tax money is in effect its own tax deduction. Ask your tax professional to run the numbers with you to try to maximize the potential after-tax return on your investments—not just the market return.
HIDDEN OPPORTUNITY 5
PUT THE RIGHT INVESTMENTS IN THE RIGHT PLACE AT THE RIGHT TIME
The most important step you can take right now to potentially reduce your taxes this year may be to review how and where you’re making retirement contributions. Why? Because you may be missing out on critical tax savings (and investment growth) if you’re not optimizing your contributions.
Depending on how close you are to retirement and your overall financial picture, you might be better off splitting contributions between retirement accounts. Or even diverting your contributions elsewhere to reduce debt, such as mortgage interest that is no longer deductible if you claim the standard deduction.
Looking at your overall portfolio and determining the optimal type, amount, and placement of contributions and savings could potentially make a big difference in how tax-efficient it is going forward into the future. You may need to do more planning than usual this year to ensure that you are squeezing out all the juice from the rules that are in place today.
MAKE THE MOST OF TAX OPPORTUNITIES THAT MAY EXPIRE AFTER THIS TAX YEAR
You’ve probably heard of FOMO: fear of missing out. In this case it might actually be helpful because it can help you take action.
Don’t lose a tax advantage to inertia, especially when it could be permanently expiring soon. While everyone must pay taxes, not everyone pays the same amount. The tax opportunities that could be most beneficial to you this year depend entirely on your personal financial situation. However, the complexity of the tax code means that in order to think through your options and make smart choices, you’ll likely need a professional to help you.
If you are currently working with a financial professional, are they looking at your tax return? They should be. If they’re not talking to your CPA, neither professional has a full picture of your finances.
You may be missing opportunities to make the most of your hard work and to potentially pay less in taxes. You’ve already taken the first step to seize these tax opportunities simply by reading through this article. While many of your peers are scrolling through social media, you already know some of the techniques that could potentially lower your taxes now and in the future.
This article is for informational purposes only. It has been compiled from data considered to be reliable, but we do not make any guarantees regarding accuracy, adequacy, or completeness. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Ari Baum, CFP® is the founder and CEO of Endurance Wealth Partners, with over two decades of experience in the Financial Services industry. He brings his in-depth experience to Conceive. Believe. Achieve. for his clients.
Brokerage and Advisory accounts carried by Wells Fargo Clearing Services, LLC. Securities and Advisory services offered through Prospera Financial Services Inc. Member FINRA/SIPC.
