Things to know about taxes for 2021 filing

Things to know about taxes for 2021 filing BY » Peter Eisenhauer

Not to interrupt your holiday celebrations, but some might say that December is also the month for making sure you are ready to square accounts with Uncle Sam early in the coming year.

Naturally, the IRS advises that we get ready.

“Tax planning is for everyone,” according to a recent IRS press release. “Get ready today to file your 2021 federal income tax return. Planning ahead can help you file an accurate return and avoid processing delays that can slow your tax refund.”

And the IRS provides detailed guidance on gathering and organizing your tax records, and making use of online account information that is available to taxpayers. There is a comprehensive set of resources available at this link: https://www.irs. gov/individuals/steps-to-take-nowto-get-a-jump-on-next-years-taxes. Among the general tips offered are to take advantage of free filing, and to file electronically and select direct deposit to get the fastest possible refund. As an added incentive, the IRS notes that direct deposit saves all taxpayers money as it is substantially cheaper to issue refunds electronically.

We asked two Lake Norman area financial professionals for their tips on preparing to file this year’s tax returns.

David Hedges, a Certified Wealth Strategist (CWS®), and President of Bookman Bright Inc. in Davidson says, “The end of every year is always an important time for financial review and clean up; especially as it relates to taxes. So, while you may be thinking about Thanksgiving, Hannukah, Christmas and any other holidays that are celebrated at the end of the year, you should put aside just a little sliver of time to make sure that your “financial ducks are in a row” and that you’ve met any end of the year IRS requirements.”

Daniel Tobias, a Certified Financial Planner, and founder of Passport Wealth Management, in Cornelius says, “With all the changes we’ve experienced this year, and are still expecting in the coming years, tax planning is becoming increasingly complex. Therefore, it can be valuable to work with a financial professional who can advise on taxes and to begin the process as early in the year as possible. Some deadlines have already passed while others are just around the corner.”

Where to begin? According to Hedges, “First, what you should do and what I do for my clients is review your tax situation as it relates to short and long-term capital gains taxes. Make sure that you don’t have any large and taxable realized gains that could easily be offset with realizing some losses before the end of the year.” “I can run quick and easy reports for my client accounts to give me a taxable gain status and hopefully you have a similar resource available as well,” Hedges said.

“This is typically the time of year where we might review last year’s tax return against the income events of this year for a given client. Doing so, against long-term income projections and a corresponding long-term plan, will help us to determine if it makes sense to convert any deductible IRA assets to Roth. ” Tobias said. “This isn’t specific to 2021 but with the Tax Cuts and Jobs Act scheduled to sunset in a few years, it’s possible that we may never see tax rates this low again. People who

are retired and not yet subject to any Required Minimum Distribution, may benefit from reviewing such a strategy.”

Hedges also focuses on the Required Minimum Distributions (RMD) on Defined Contribution Plans including Traditional and Rollover IRAs.

“This is a biggie because the penalty for any money not distributed by year end (12/31) is 50%! Yes, 50%,” Hedges said. He also stresses that there have been recent changes to age requirements: “An important point to make for RMDs is that the age has changed per the passing of the SECURE Act in 2019. You were previously required to start your RMD by April 1st after the year that you turned age 70 1⁄2.” “The new rule states that if you’ve reached age 70 1⁄2 before January 1, 2020, the old requirement still applies but if you haven’t reached age 70 1⁄2 by January 1, 2020, the new requirement is making your RMD by April 1 of the year following the year that you turn age 72. In summary, if you haven’t turned 70 1⁄2 by January 1, 2020, your RMD requirement is now by April 1 of the year following the year that you turn age 72.”

Tobias adds that for business owners, particularly those who are sole practitioners, some employer based retirement plans may need to be in place and/or contributed to by the end of the year.

“Depending on income levels, a sole practitioner who has the ability to max-fund a Solo 401k, for example, could experience a very big tax impact a few months from now when they file taxes,” Tobias said.

Notable changes for 2021

Tobias points to an opportunity that may apply to recent retirees: “Anybody with a significant decrease in income for 2021, such as someone who retired at the end of 2020 or the start of 2021, who didn’t already receive economic stimulus checks at the start of 2021, may have one last chance to qualify for those checks based on their 2021 taxes,” Tobias said. He advises that if such a person, or their spouse, is still working, it may make sense to consider pushing as much income as possible into a retirement plan (e.g. 401k) to reduce 2021 taxable income in order to qualify.

Tobias notes that with the reconciliation bill working its way through Congress it’s a little difficult to know what is going to happen next year and beyond. “For individuals who do an annual Back-Door Roth IRA contribution, or possibly anybody with basis in an IRA, now may be the time to convert these assets to Roth IRAs as this might not be allowed in the future,” Tobias advised.

Any individuals who typically have a large amount of capital gains each year, or who have large appreciated assets, might find it worthwhile to recognize some gains in 2021 to hedge against any potential increase in the rate of capital gains taxation in 2022 and beyond.

As always, the motto ‘be prepared’ applies.

“The bottom line is to make sure that you consult a professional if you’re unsure of any end of the year tax requirements that could land you in hot water!” said Hedges.

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