It’s not too late – you can always cut your 2021 tax bill. Here is how.

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With the end of the year fast approaching, it’s time to consider measures that will cut your tax bill in 2021 and hopefully position you for tax savings in years to come. This column is part 2 of my list of suggested end-of-year strategies. In Part One, we addressed a number of proposed federal income tax increases that are making year-end tax planning very uncertain this time around.

In this column, however, we advance the rest of the year-end planning story, fully understanding that things may change. So stay tuned and stay flexible, my friends. In the meantime, continue!

If you are charitable: sell losing stocks and give away the resulting money; Give away winning shares

If you want to give gifts to charities or loved ones, you can do so in conjunction with a major reorganization of your taxable account balance and equity fund portfolio. Give according to the following tax-friendly principles.

Gifts for charityS.

Don’t give up losing stocks (currently worth less than you paid for them). Instead, sell the shares and post the resulting tax-saving capital loss. Then you can donate the cash proceeds to charity.

Sell ​​loser stocks and cash in on the resulting tax-saving capital losses. Then donate the cash proceeds to charity and claim the resulting tax-saving depreciation for charity, assuming you have any deductions. Following this strategy offers a double tax benefit: tax-saving capital losses plus tax-saving charitable deductions.

On the other hand, donate winning shares instead of giving away cash. Why? Because donations of listed shares that you have owned for more than a year lead to deductions for charitable purposes that correspond to the full current market value of the shares at the time of the donation, provided you list this. Additionally, by donating winning shares you will avoid all capital gains taxes on those shares. This idea saves taxes twice: You avoid capital gains taxes and receive a tax-saving donation deduction. Meanwhile, the tax-exempt nonprofit organization can sell the donated shares without owing Uncle Sam.

Make gifts to your loved ones

The principles for tax-smart gifts to charity also apply to gifts to relatives and other loved ones. Give away profit shares. Most likely, the gift recipient will pay a lower tax rate than you would pay if you sold the shares. Sell ​​loser stocks and cash in on the resulting tax-saving capital losses. Then give the cash sale proceeds to loved ones.

Make charitable donations from your IRA

IRA owners and beneficiaries who are 70½ years old are permitted to make monetary donations of up to $ 100,000 directly from their IRAs to IRS-recognized public charities. These so-called qualified charity distributions, or QCDs, are tax-free to you, but you will not receive a separate charitable write-off on your Form 1040. That’s fine, because the tax-free treatment of QCDs equates to an instant 100% federal income tax deduction without worrying about restrictions that can delay charity depreciation.

QCDs also have other tax benefits. Contact your tax advisor if you would like to find out. If you are interested in taking advantage of the QCD 2021 strategy, you must agree with your IRA trustee or custodian that the money will be paid out to one or more qualified charities before the end of the year.

Consider a Roth IRA conversion

The best scenario for converting a traditional IRA to a Roth account is when you expect to be in the same or higher tax bracket in retirement. That is certainly a legitimate expectation. However, the conversion will incur current tax costs as a conversion will be treated as a taxable liquidation of your traditional IRA followed by a non-deductible contribution to the new Roth account. If you don’t convert until the next year or later, the tax cost may be higher depending on what happens to the tax rates.

After the conversion, all income and profits accruing to the Roth account as well as all withdrawals are exempt from federal income tax – provided they are qualified withdrawals. Qualified withdrawals are generally those made after: (1) you have had at least one Roth account for more than five years, and (2) you are 59. With qualifying withdrawals, you avoid (or your heirs if you inherit) higher tax rates that might otherwise apply in the coming years. The current tax burden from a Roth conversion, while undesirable, could be a relatively small price to pay for future tax savings.

Prepay college bills

If your AGI 2021 allows you to qualify for American Opportunity College Credit ($ 2,500 maximum per eligible student) or Lifetime Learning High Education Credit ($ 2,000 maximum per family), consider prepayment of college tuition that are not due until the beginning of 2022, if this would lead to a higher crediting on this year’s Form 1040. You can apply for 2021 credit based on prepayment of tuition fees for academic periods beginning January through March next year.

For 2021, both credits will expire (reduced or eliminated entirely) if your modified adjusted gross income (MAGI) is too high. The exit range for unmarried people is between $ 80,000 and $ 90,000 MAGI. The range for married joint filers is between $ 160,000 and $ 180,000 MAGI. MAGI means “regular” AGI, taken from your Form 1040, plus certain tax-exempt income from outside the US that you are unlikely to have.

Postpone income into the next year – if you dare

It may also be worth deferring part of your taxable income from this year to the next, if you are optimistic that you will be in the same or lower tax bracket in 2022, you can defer your taxable income by choosing wait until the end of the year to send some customer invoices. That way, you won’t get paid until early 2022. You can also defer taxable income by accelerating some deductible business expenses this year. Both steps will move taxable income from this year to next year if you are optimistic that it could be taxed at lower rates.

The last word

Nothing is completely certain about federal income tax right now, including year-end tax planning advice. But I think what we are saying here and in my previous column is good based on what we currently know. In the meantime, as I said at the beginning, stay tuned and stay flexible – until the big ball falls. You may need to do last minute movements.

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