In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses 2021 tax and retirement planning strategies as we approach the end of the year. December 31 is the last day you can take advantage of many tax-saving opportunities.
It’s that time of the year again. The holidays are upon us and soon we’ll change over the calendars to 2022. But first, it’s time to look at some tax planning strategies for 2021. There’s still time to lower your tax bill for the year, and put aside money for retirement. Who doesn’t want to save on taxes, especially when those credit card bills come due!
Retirement Plan Contributions
Obviously, the more money you make, the more taxes you pay. The easiest way to pay less taxes is to decrease your earned income for the year. The easiest way to do that is by contributing to a traditional, or pretax, retirement plan. All pretax contributions made to a plan will lower your income for the year.
There are generally two types of retirement plans – a workplace plan, such as a 401(k) or 403(b) and an IRA. These plans have different contribution deadlines. If you have an IRA, you have until April 15 of the following year to make your contribution. You may contribute up to $6,000 plus an additional $1,000 if you are at least age 50. These limits will remain the same for 2022. If you don’t have an IRA, what are you waiting for!? Start one now, and lower your tax bill
If you have access to a workplace retirement plan, you can lower your bill even further. For 2021, you may contribute up to $19,500 in pretax funds into the plan. If you are age 50 or older, you can contribute an additional $6,500 for a total of $26,000. Contributions must be made prior to the start of the new year.
What if you are Self-Employed?
If you are self-employed or have a business without any full-time employees (other than a spouse or partner), you can save even more with a Solo 401(k). As with a regular 401(k), you can make contributions as the employee. Additionally, you can make contributions as the employer as well. The profit sharing contribution can be made until your business files its tax return. For most, that will be April 15, the tax deadline.
In total, you may contribute up to $58,000 to a Solo 401(k) and $64,500 if your at least age 50. It’s easily the best way to save on taxes for 2021.
If you are self-employed and don’t have a Solo 401(k) plan yet, you can start one now, and make the full contribution. If you wait until the new year, you can only make the employer profit sharing contribution. That amount is limited to 20% or 25% of your self-employment income, depending on the type of business you have.
Listen to More: Leaving Your Job? Don’t Forget Your Money!
Another popular strategy to look at is the Roth conversion. A conversion will actually raise your tax bill for the year. So why do it? The idea is to pay taxes now to enjoy the tax-free benefits of the Roth IRA or 401(k) plan. All qualified distributions from the plan are tax free! On the other hand, distributions from a traditional plan are taxable during the year they are made.
A Roth conversion must be made before the end of the year. Further, because of the Build Back Better Act, the popular “Backdoor” Roth will no longer be allowed after the end of the year.
Essentially, the backdoor allows you to contribute after-tax funds to a traditional plan, and immediately convert them to Roth. This has become popular with those who earn too much money to directly contribute to a Roth. Assuming the bill gets passed in the Senate, you have until the end of the year to utilize the back door.
Required Minimum Distributions
If you are at least age 72, or will turn that age before the end of the year, you must start drawing down your retirement plan. The IRS does not allow you to sit on tax-free wealth forever, so they instituted the required minimum distributions (RMD) rules.
If you turned 72 during 2021 and need to take your first RMD, you have until April 1 of next year to do so. Keep in mind, if you wait until next year, you will have two RMDs to take – one for 2021, and one for 2022.
From the second RMD moving further, you have until December 31 to take the distribution. Failure to do so will lead to a 50% penalty of the amount you were supposed to withdraw. If you haven’t taken your RMD yet, make sure to get it done now!
2021 Personal Tax Planning Strategies
There are several personal tax planning strategies that Adam goes into in this episode. We’ll briefly talk about each one. Be sure to listen to the podcast for more details!
Standard vs. Itemized Deduction: If you are married filing jointly, the standard deduction is $25,100. If you are single, it’s half of that amount. Most people should be good with the standard deduction. If you have deductions worth more than that, like property taxes and mortgage interest, you may be better of itemizing.
Child Tax Credit: If you earn $75,000 as a single or $150,000 married filing jointly, you will receive a tax credit for children under 17 years old.
Self-Employed Health Care Premiums: You can deduct 100% of your monthly premiums for yourself, spouse and dependents.
Student Loans: You can deduct $2,500 in student loan interest if you under certain thresholds.
Charitable Giving: You can deduct up to $300 per person for charitbale donations. Plus, if you itemize, you can deduct up to 100% of your annual gross income (AGI)
Harvesting Losses: If you had stocks or cryptos that suffered losses, you can sell them and deduct up to $3,000 in losses.
SALT: You can prepay your state and local taxes (both income and property) that are due early next year. The maximum you can deduct is $10,000, or half that if filing separate. This can decrease next year’s tax bill.
Coronavirus Repayment: If you took a CARES Act distribution from a qualified plan because you were affected by COVID-19, you have three years to make contributions back to the plan.
There’s still a couple weeks left to take advantage of these tax planning strategies. Make the most of your income, save for retirement, and lower your tax bill! We appreciate everyone who has taken the time to listen to Adam Talks this year. Be sure to check out our SoundCloud page to stay updated with weekly episodes. Until then, have a wonderful and safe holiday season!