Year-End Tax Planning Tips for Busy Professionals

As 2021 draws to a close, year-end tax planning may be the last thing on your mind. However, now may be your last chance to take advantage of certain opportunities to reduce your tax bill. Although President Biden’s proposed tax plan is still under consideration, high earners and high-net-worth individuals are likely to be impacted—possibly as soon as next year.

Not to mention, many equity investors have benefited from double-digit stock market gains this year. Depending on your overall income, now may be a good time to realize capital gains or offset them with losses.

No matter your tax bracket, no one wants to overpay Uncle Sam on Tax Day. Before raising your glass to toast the new year, be sure to check in with your CPA or financial planner to determine which tax planning strategies make sense for you.

If you’re looking for last-minute strategies to lower your 2021 tax bill, consider these year-end tax planning tips:

Tax Planning Tip #1: Max Out Qualified Retirement Contributions and HSAs

Be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans for 2021. You can also contribute up to $6,000 to an individual retirement account in 2021 ($7,000 if you’re age 50 or over).  If you haven’t already maxed out your qualified retirement plan contributions, consider doing so before year-end to reduce your 2021 tax bill.

In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA). Though not technically a retirement account, an HSA can be a great way to save and grow your money for retirement on a tax-advantaged basis. (Something to keep in mind during open enrollment.) HSAs offer triple tax savings. In other words, contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses.

Tax Planning Tip #2: Consider Charitable Donations for Year-End Tax Planning

If you’re feeling charitably inclined this holiday season, consider donating to your favorite non-profit. Those who itemize may be able to deduct up to 100 percent of qualified contributions from their adjusted gross income.

Alternatively, if you own a financial asset that has appreciated significantly in value, you may want to consider donating it to an IRS-approved charity. (Especially if the capital gains tax increases for top earners). Not all charities accept non-cash donations. However, many donor-advised funds and community foundations will take securities and other assets in kind.

For more charitable giving ideas for year-end tax planning, here are My Three Favorite Ways to Donate to Charity.

Tax Planning Tip #3: Review Deferred Compensation Agreements

Employees with deferred compensation agreements typically pay taxes on the money when they receive it—not as they earn it. That means if your employer pays you a lump sum per your distribution agreement, you could potentially incur a hefty tax bill.

There are different ways to structure income from a deferred compensation plan. Typically, your options depend on your agreement with your employer. Your distribution schedule can usually be found in your plan documents. So, if you haven’t reviewed your plan details recently, you may want to revisit them before year-end to avoid any surprises.

Tax Planning Tip #4: Explore Tax Loss Harvesting to Minimize Capital Gains

Unmanaged capital gains can eat away at your investment returns over time—specifically in non-qualified investment accounts. Fortunately, the IRS allows investors to offset realized capital gains with realized losses from other investments.

That means you can realize profits on your top-performing investments while selling poor performers to reduce your overall tax liability. Moreover, if you have enough losses, you may be able to completely offset your gains and potentially reduce your taxable income. It’s important to note that most fiduciary financial planners proactively take advantage of tax-loss harvesting to help their clients with year-end tax planning.

Tax Planning Tip #5: Delegate Your Year-End Tax Planning to a Trusted Financial Advisor

Tax laws are continually in flux. And most busy professionals simply don’t have the time to explore every opportunity to reduce their tax bill. If year-end tax planning is the bane of your existence, consider partnering with a trusted financial advisor. A financial advisor can help you take advantage of the strategies most likely to benefit you.

SageMint Wealth is a wealth management firm for high-net-worth individuals, families, and business owners. We’re committed to helping you grow your wealth and align your money with your goals and values. If you’re looking for a fiduciary financial advisor to help you develop a plan for your wealth, we’d love to meet you and see if we’re a good fit.

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 advisor.