Year-End Tax Planning During Uncertain Times

Jalene Hahn |

Psychologically, year-end 2021 tax- and estate-planning efforts are being influenced by proposed tax law changes, the lingering pandemic, the threat of inflation and general economic uncertainty. All of these factors muddy the landscape regarding sensible tax planning.

Most of the proposals being bandied about in Washington, D.C., focus on taxpayers with an ultra-high net worth (more than $30 million) and the top 5% of income earners (more than $450,000 annually). With all the noise, it is easy to get distracted and lose sight of what’s important to the rest of us, which is focusing on the tried and true and getting back to basics.

Here are some of the topics everyone should review:

Retirement accounts

  • Have all employer-sponsored retirement account contributions been utilized?
  • If eligible, have Roth IRA contributions been made?
  • If over 72, have you taken your required minimum distributions or made qualified charitable distributions?
  • If eligible, have you made the maximum health savings account contribution?

College planning

  • If you have a college goal and are an Indiana taxpayer, have you made at least $5,000 in contributions to a College Choice 529 account to be eligible for a state tax credit?
  • If you have money in a 529 account and your student received grants or scholarships, have you reimbursed yourself for that aid from his or her 529?

Investments—taxable accounts

  • If you have direct stock investments, have you looked at the impact of taking any capital gains or losses?
  • If you are invested in mutual funds, have you estimated year- end capital-gains distributions?

The benefits compound across multiple years. This is especially important in 2021 due to our current low-tax environment. I firmly believe we will not see tax rates this low for several years, if ever.

When working with clients, I am not just working with the current generation but am also looking at future potential impacts on the next generation. I inherited my mother’s 403(b) account when I was 36. If the current rules were in place, I would have had to distribute the balance over 10 years instead of over my lifetime. We were not in our prime earning years, but depending on how we made the distribution, it would have greatly impacted our taxes. I see the potential for that happening with clients who have retirement account balances of more than $2 million.

Some of the more advanced tax-planning strategies for retired individuals include:

  • Does it make sense to convert part of an IRA to a Roth?
  • Does it make sense to take an IRA distribution even though you don’t have a required minimum distribution?
  • How close are you to the next tax bracket, and what will that make your marginal tax rate?
  • Will additional income affect how your Social Security income is taxed?
  • What impact do these changes make to your Medicare IRMAA (or income-related monthly adjustment amount) surcharge or to your health insurance premium if you are receiving a subsidy on health insurance?
  • Is it appropriate to start gifting to children?

Every situation is different, and a strategy that is right for one individual might not be appropriate for another.

Many financial advisers do not have the training or expertise to be effective tax planners. The person who prepares your tax returns often does not do tax planning.

Most people turn to a CPA for tax planning, but it is important to find a professional who works with people in situations like your own. For example, if you are a small-business owner, you wouldn’t want someone who works with corporate executives. Even small-business owners have unique needs, depending on their industry and operations.

Check out different websites and read articles or newsletters to get a sense of a CPA’s client base. Get referrals, ask questions, and do some interviews. Helpful hint: You might want to wait until after tax season next year to conduct your interviews.