Wealth of Insights – Tax Savings Strategies

As 2021 comes to a close, now is a good time to start thinking about your taxes and making sure they are aligned with your financial goals. Our resident Manager of Tax Services, Rita Yeung, CPA, highlights some tax savings strategies to consider before year end that take into consideration the existing economic outlook and potential changes in the tax environment.

Charitable Gifts

• Qualified Charitable Distributions (QCD): For IRA owners who are 70 ½ or older, charitable donations up to $100,000 per year can be made directly from you IRA, without including those distributions in you gross income. For Massachusetts residents, there is no deduction for out of pocket charitable donations against your state taxes. If you consider making a charitable contribution out of your IRA instead however, you can reduce your state income tax. Keep in mind that charitable donations made from an IRA will also be counted towards your annual required minimum distribution amount.
• Charitable Gifting Tax Benefits: The Covid-19 relief package extended some of the tax benefits for charitable gifting into tax year 2021. Individuals who take the standard deduction are now eligible to deduct up to $300 for cash donations that are gifted to charities; for married couples, the deduction is up to $600. This “above-the-line” deduction will reduce your overall income before arriving at adjusted gross income.
• Charitable Cash Contributions: For those who take itemized deductions, any charitable cash contributions that are made to public charities are now eligible to offset 100% of the adjusted gross income this year. Traditionally, the deduction for most cash charitable contributions is limited to 60% of the adjusted gross income – this limit was temporarily suspended for tax years 2020 and 2021. This is extremely beneficial for anyone who is recognizing unusually high income in 2021.

Gifting Opportunities

• Lifetime Gifts: There is speculation as to whether the lifetime estate and gift tax exemption would fall back down to the $6 Million level under this year’s tax bill. Even though this was included in the initial proposal, it was ultimately removed in the latest draft of the reconciliation bill. With that said, the current exemption ($11.7 Million for 2021) is still set to expire by end of 2025, at which point it will be reduced back to $5 Million indexed for inflation. For high net worth individuals, now is a good time to consider making lifetime gifts to reduce your overall estate before there is any future change to the exemption amount. Even if the existing gifts will use up your current $11.7 Million exemption, there will be no claw-back by the IRS in the future if/when the threshold is reduced. This approach would also avoid a tax on any previously made gifts if the lifetime exemption gets reduced.
• Annual Gift Exclusion: The annual gift exclusion allows donors to make tax-free gifts up to $15,000 to each beneficiary without being counted towards his or her lifetime exemption. Two spouses can also elect to “split” a gift that is being made to a single beneficiary. In doing so, each spouse is perceived to have made half of the total gift. This approach allows married couples to gift away $30,000 to each donee without using their lifetime exemptions. Lastly, any medical or tuition payment being made directly to a provider on behalf of another individual is exempt from the gift tax and there is no limit on the amount that can be made. This is a wonderful way to “gift” to the next generation and/or their children by reducing the outlay or borrowing to fund education expenses.

Proposed Tax Bill Implications

• Proposed Retirement Plan Implications: According to the proposed tax bill, all employee after-tax contributions in qualified plans and after-tax IRA contributions are prohibited from being converted to a Roth IRA, regardless of income level. High income taxpayers will also no longer be able to convert traditional IRAs or other non-Roth accounts to Roth IRAs or Roth designated accounts. This provision will apply beginning in tax year 2022 if it gets passed by the Congress. Therefore, anyone who would be affected by this should consult with their financial and tax advisors to assess whether any Roth IRA conversions should be made prior to the enactment.
• Proposed State and Local Income Tax Implications: The proposed reconciliation bill increases the state and local income tax deduction threshold from $10,000 to $80,000. If this is included in the final bill, then taxpayers could take a higher deduction amount. Therefore, it may be advantageous to pay the 4^th quarter state estimate and real estate tax bills that are due next year before year end to get the deduction earlier.