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Last Chance: Save Money with These Tax Tips Before Year-End

Tax planning should be part of every individual investor’s financial and retirement plan. Here are 7 things to consider as you weigh potential tax moves between now and the end of the year to help you save money:

1. Defer income to next year

Consider opportunities to defer income to 2022, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

2. Accelerate deductions

You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2022) could make a difference on your 2021 return.

3. Make deductible charitable contributions

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)

For 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction).

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. There may not be much time for employees to request a Form W-4 change and for their employers to implement it in time for 2021. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.

5. Maximize retirement savings

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2021 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2021, you can contribute up to $19,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older).* The window to make 2021 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2022, to make 2021 IRA contributions.

*Roth contributions are not deductible, but Roth qualified distributions are not taxable.

6. Take required minimum distributions

While required minimum distributions (RMDs) were waived for 2020, they are back for 2021. If you are age 72 or older, you’re generally required to take RMDs from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the withdrawals by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 50% of the amount that wasn’t distributed on time.

7.  Weigh year-end investment moves

You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

Prepared by Broadridge Advisor Solutions. Copyright 2021. Edited by BFSG, LLC.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

How to Profit from Inflation

Do you have excess cash reserves that you won’t need for 12-months? If yes, then consider Series I savings bonds. These bonds pay a fixed rate for the life of the bond (today it is 0%), plus the annualized Consumer Price Index (CPI) inflation rate. With the interest compounded semiannually, these I Bonds will pay a total annualized interest rate of 7.12% through April 2022, well in excess of any other safe yield obtainable (*see below on liquidity constraints). If inflation rises, the rate will go up when it resets in April. The bonds also protect against deflation: the overall rate on the bonds can never fall below zero. A win-win scenario.

In addition, the interest on an I Bond is exempt from state and local income taxes, and if you use the proceeds for qualified higher-education expenses, the interest is exempt from federal taxes as well (*income restrictions apply). Interest is deferred until the bond matures or is cashed in and you don’t pay federal taxes until you redeem the bond.

Maturity takes 30 years, and you must hold a Series I bond for 12 months, but you can cash them in after one year with a small penalty and after five years without any penalty. 

You can buy up to $10,000 per person per year directly from Treasury Direct. Couples can use a year-end strategy to bring their holdings to $40,000, with each spouse buying $10,000 in December and another $10,000 in January. Another $5,000 in I Bonds can be purchased with an income-tax refund.

Source: https://www.wsj.com/articles/treasury-has-a-i-bond-bargain-inflation-stocks-interest-rates-rebalancing-investment-11639586799?st=wmrzg5ujzlc9hlp&reflink=desktopwebshare_permalink

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Welcome to the Team – Xiaomei Huang

Please join us in welcoming Xiaomei Huang, MBA, MS, to Benefit Financial Services Group. Xiaomei joins BFSG as a Securities & Financial Analyst. As a Securities and Financial Analyst, Xiaomei’s current responsibilities include analyzing securities using fundamental research. Prior to joining Benefit Financial Services Group, she worked in the media, and she approaches security analysis like how a journalist chases a story.

Xiaomei holds her MBA degree from Xiamen University and her Master of Science degree from University of Strathclyde. She graduated with Distinction from UCLA Extension in Finance. She is also pursuing her CFA® designation.

We are very excited to have her on the BFSG team!

The Least Understood Risk to Retirement

You have done a great job preparing for retirement, but do you understand the risks? Timing is everything, and early market declines at retirement, particularly if they are paired with rising inflation, can significantly reduce the longevity of your retirement nest egg. Learn from Paul Horn, CFP® in this 2-minute BFSG short as he discusses the least understood risk to retirement – sequence risk and ways you can address sequence risk.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.

Take Advantage of These Charitable Giving Perks Before They Expire

By:  Michael Allbee, CFP®, Senior Portfolio Manager

Did you miss out on #GivingTuesday? You still have time to take advantage of two temporary perks for cash gifts to charities before they expire at year-end.

The first perk for those that itemize deductions, allows 100% of cash gifts (including by check, credit card or debit card) to be deductible in 2021 (this also applied for 2020). Normally the limit is 60% of adjusted gross income (AGI). So, a person with $200,000 AGI, can now deduct up to $200,000 if charitable gifting is made in cash, where normally they would be capped at $120,000 (60% limit). These charitable contributions CANNOT be used for Donor Advised Funds or 509(a)(3) supporting organizations.

For those that already maxed out your charitable gifting (up to $100,000) from your traditional and/or inherited IRAs by using Qualified Charitable Distributions (QCDs) and want to gift more to a charity, you may want to consider taking the remainder gift from your tax-deferred retirement account (if you are over age 59.5 to avoid penalties) which would increase your AGI since the distribution is treated as taxable income but simultaneously offset that income via the 100% deduction for the cash gift. This strategy would be especially effective if some of the IRA changes under consideration before Congress become law. Currently, in its Build Back Better legislation, Congress is proposing restrictions on so-called “mega IRAs” with balances over $10 million. The legislation would mandate required distributions of 50% of the amount exceeding $10 million and require distributions of 100% of the IRA balance exceeding $20 million—potentially creating major tax events for some individuals in the coming years.

The second expiring perk is the opportunity to deduct cash gifts to eligible charities of up to $300 for single tax-filers and $600 for couples against taxable income, even if you claim the standard deduction (great news for the 90% of households that take the standard deduction each year). Let’s say a married couple with an effective tax rate of 25% jointly donated $750 throughout the year. If they take the standard deduction, they’d be able to deduct the full $600, lowering their federal tax liability by $150. Keep in mind that donations made to individuals are not tax-deductible (i.e., GoFundMe campaigns).

Charitable giving provides you the opportunity to create a meaningful legacy and support the causes that are important to you. Consider speaking with your financial professional at BFSG for guidance around your philanthropic goals and assistance on the execution.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.