End of Year Tax Planning Guide for 2021

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The weather is getting colder and signs of the holiday season have arrived. But besides spending more time with family and friends, now is the time to think about taxes. The following is a list of tax strategies to make the most of 2021 and prepare for the 2022 tax year.

Strategy #1: Tax Loss Harvesting

If you’re reading this blog, you already know that any profits you earn from securities are taxable as capital gains. And you may also be aware that you can offset some of these gains with certain losses you suffered from your investments. The process of selling investments at a loss to reduce your taxes on capital gains is sometimes called “tax loss harvesting.” But there are three things to keep in mind when using this strategy.

One, there are limits to how much loss harvesting you can do each year. For the 2021 tax year, you’re limited to using up to $3,000 in losses to offset eligible capital gains. However, any losses in excess of $3,000 can be used for the 2022 tax year.

Two, only apply this tax strategy if you were already thinking about selling a stock or security. In other words, don’t let the desire to reduce your taxes be the primary motivating factor when making an investment decision.

Three, there are “wash rules” which prevent you from selling a security late in the year, then quickly buying it back early the next year. These rules don’t actually prevent you from buying a security you just sold, but they could prevent you from making use of tax loss harvesting.

Strategy #2: Reconcile Your Advanced Child Tax Credits

The American Rescue Plan passed by Congress in 2021 modified how Child Tax Credit payments work. Traditionally, the Child Tax Credit was $2,000 per child. But thanks to the American Rescue Plan, this was increased to $3,000 or $3,600, depending on the age of the child. In addition to increasing the Child Tax Credit, this new law also allowed eligible families to receive a portion of this tax credit early.

But this advance Child Tax Credit could lead to some families getting hit with a larger tax bill when they file their taxes in early 2022. Alternatively, it might result in a smaller-than-expected tax refund check. This is because these monthly advance payments are offering money to families in 2021 that they would have typically received in 2022.

In January 2022, the IRS will send applicable households Letter 6419. This provides the total amount of advance Child Tax Credit payments that the family received for the 2021 tax year. This will help you know if what to expect when you file your 2021 taxes.

Strategy #3: Make a Charitable Donation (In Cash)

If someone makes a charitable donation to a qualifying tax-exempt organization, they must itemize their tax deductions to receive the tax deduction. But there’s a problem. With the increased standard deduction, fewer taxpayers are itemizing their tax deductions. This reduces the incentive for some people to make charitable contributions.

To combat this possible trend, there’s a special 2021 rule in place that allows taxpayers to claim the standard deduction but also claim a $300 tax deduction for qualified charitable contributions ($600 for married couples). So what’s the catch? The catch is that the donation must be made in cash

In Closing

The above is just a sampling of strategies to take advantage of before the end of the year. To learn more about how to reduce your taxes, consider contacting your tax professional.

The good news is Kienitz Tax Law is here to help you with your tax issues. Schedule your FREE consultation today!


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