Investor Column | Start planning now to save on next year’s tax bill. Here’s how

While the 2020 tax season is mostly over, the 2021 tax planning “season” is not!

Congress has passed four major pieces of tax legislation in the last 15 months, so it’s important to become familiar with these changes, and how they may impact your own tax return. Here are some common strategies that might help lower your income tax bill for 2021:

Manage capital gains. If you make a gain selling an investment you’ve held for more than one year, that gain is generally taxed at preferential rates, which are 0%, 15%, and 20% for most investments, depending on your taxable income. Because increases to capital gain and ordinary income tax rates are being proposed in the future, it might make sense to sell appreciated securities in 2021 versus waiting until 2022 when taxes may be higher.

Consider Roth conversions. Wealthy individuals eligible to take advantage of historically low tax rates should consider converting traditional IRAs to a Roth IRA. The IRA owner will owe income tax on the converted funds in 2021, but will not be required to take further distributions in their lifetime, and ultimately, beneficiaries could then inherit these funds tax-free.

Plan for child tax credits. The American Rescue Plan Act (ARPA) expanded child tax credits, which are designed to provide tax relief for parents — working or not — who have qualifying children under the age of 17. Single taxpayers making less than $112,500 per year (or married with income < $150,000) will receive $3,600 per child under six years old and $3,000 per child age six to 17. If your income is close to these limits, work with your tax advisor now to help you qualify for these credits. Note: If your 2020 income qualifies you for this credit in 2021, the IRS may start sending you advance monthly payments for 2021 starting in July. If you end up not qualifying for this credit, you will need to pay this back when you file your tax return for 2021.

Plan for the child & dependent care tax credit. This credit offers relief to working people who must pay someone to care for their children/dependents. If you meet all six “tests” to qualify for credit in 2021, your credit may be as high as $4,000 (50% of $8,000, depending on your income) of care expenses paid for one dependent and up to $8,000 for two or more dependents. For 2021 only, the 50% rate begins to phase out if your adjusted gross income (AGI) is more than $125,000, and completely phases out if your AGI is more than $438,000, so managing income levels in 2021 may be key to getting the full benefit of this credit.

Revisit your deduction strategy. For 2021, married taxpayers are entitled to a standard deduction of $25,100 ($18,800 for heads of household & $12,550 for single taxpayers). If mortgage interest, charitable contributions, medical expenses and taxes total more than this, taxpayers should itemize deductions. “Bunching” deductions is a strategy to “make the most” of both, usually by pushing two years’ worth of expenses (elective medical, charitable gifts, property taxes, etc.) into one year in order to itemize, and then taking the standard deduction in the “off” years.

Student loan debt “benefit.” Employers can now contribute up to $5,250 each year (through 2025) toward an employee’s student loans and it will not count as gross income to the employee. Graduates with student loan debt should consider approaching their employers about providing this extra “perk.”

Take advantage of charitable contributions. If you do not itemize deductions, in 2021 you can still donate $300 to charity and get a deduction. And if you itemize deductions for 2021, you are allowed to deduct up to 100% of your adjusted gross income for donations made to qualified charities.

While tax planning can be quite complex, it should not be put off until the last minute. If any of these ideas piqued your interest, contact your tax professional soon, and make a plan to keep your taxes for 2021 as low as possible.

Karin Grablin is with SRQ Wealth, One North Tuttle Ave., Sarasota, FL 34237, 941-556-9004. www.srqwealth.com. Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity. This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks, LLC nor any of its representatives may give legal or tax advice.