This has been a tumultuous year for Americans. Most of us will bid 2021 good riddance and welcome the New Year with open arms. But, before we do that, a little planning now can help us to prepare for next year.
There are many ways to adjust your finances to receive the greatest income tax advantage. Keep some important principles in mind.
- A dollar in tax today is more expensive than a dollar in tax tomorrow.
- Try to accelerate deductions by paying for them or even putting them on a credit card by December 31st.
- Try to defer income, which may prove more difficult unless you own a business.
- Try to manipulate your income to avoid income-driven decreases in deductions or other benefits. Medical and miscellaneous expenses are only deductible to the extent they exceed 7.5% and 2%, respectively, of your adjusted gross income. Roth IRA contributions and conversions cannot be made if your income is above a certain level.
Recent declines in the stock market may prove harvesting losses to be worthwhile, if consistent with your investment goals. Short-term capital losses, (those under a year) can be used to offset short-term capital gains, which would otherwise be taxed at up to 39.6%. To the extent capital losses exceed capital gains, they may be used to reduce your ordinary income to the extent of $3,000. The excess can be carried forward. If you have purchased shares of the same security at different times, you can designate the particular shares you want to sell. Of course, typically you would want to sell those with the highest tax basis to create the largest loss or smallest gain. However, if you have already recognized a great deal of losses this year, you may want to recognize short-term gains to utilize the losses. If you decide to designate the particular shares, discuss with your broker the shares you want to sell. Be sure to get a written confirmation regarding those shares, and keep this confirmation in a safe place with other tax records.
Many of us are charitably inclined during a time of crisis. A charitable contribution before year-end can help reduce your taxes. You can leverage your charitable gift by giving appreciated property. You can even retain an income interest in the property and have the property go to the charity after your death. This method, called a “charitable remainder trust”, provides a current benefit to both you and the charity. You get a current income tax deduction for the value of the remainder the charity will get at your death. The charity reflects the gift as current, qualifying for fundraising goals such as matching gifts.
If you make annual gifts using your $10,000 annual gift tax exclusion, those transfers must be made by December 31st. If you are writing a check, you must give it to the recipient by December 31st. However, unless it is cashed by December 31st, the gift is brought back for estate tax purposes if you die before it is cashed.
Now is the best time to create / develop strategies to save taxes and, more importantly, avoid worries next year. A comprehensive plan includes, (at a minimum) Powers of Attorney to ensure necessary decisions are made during your incapacity, a Will to express who should serve as guardian of minor children and designate recipients of property, and a Revocable Living Trust to add flexibility during life and simplicity at death. In addition, a gifting plan can help avoid income tax, as well as estate taxes. For example, gifts of income producing property to children (age fourteen and over) can make that income taxable to the child rather than to the parent. Since the child is normally in a lower tax bracket, this can save thousands of dollars in taxes.
Now is the time to put a plan in place and focus on more important things, like your family. A qualified estate planning attorney can help safeguard your future and protect your assets.
Mr. Ronald “Chip” Morrison, Jr. is a member of the American Academy of Estate Planning Attorneys and has been engaged in the practice of estate and elder law for more than 16 years. Estate planning is an easy task to check off your “to-do” list alongside last-minute tax and financial moves to make before the year’s end. If you need help completing any of these items, please call our office at (504) 831-2348, or contact us through our website.
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