2021 Year-End Tax Planning Guide for Individuals (2024)

We know this year has been challenging in so many ways—job loss, illness, hybrid schooling, and ongoing uncertainty. Adding taxes to the list, especially in a year with so much change, can feel burdensome and overwhelming. That’s where we come in. We hope this guide can help you sift through your year-end planning and make decisions that improve your financial wellbeing. If you have questions or concerns about 2021 and 2022 tax planning, don’t hesitate to get in touch with your Aldrich Advisor.

Here, we compiled the highlights and opportunities to help you plan for the future and potentially save money. The guides are divided into recommendations for businesses and individuals.

Table of Contents

• Child and Dependent Tax Credits
• Recovery Rebate Credit
• Required Minimum Distributions
• Charitable Contributions
• Cryptocurrency Transactions
• Student Loan Repayment
• Gift and Estate Planning
• Portland Metro Tax Update
• Proposed Tax Changes for 2022

Child and Dependent Tax Credits

Advanced Child Tax Credit Payments

The American Rescue Plan Act (ARPA) made a few important changes to the child tax credit (CTC) for 2021. The credit has increased for some taxpayers and become available as an advanced payment for all taxpayers. Previously, taxpayers could only claim $2,000 per child under 17, and the credit was reduced as adjusted gross income went over $200,000 for single parents and $400,000 for joint filers. Only $1,400 of the credit was refundable, when the taxpayer had no tax liability. The ARPA increased the credit to $3,000 per child and $3,600 per child under six. The credit is now fully refundable and includes children who are 17. The enhanced credit under ARPA phases out for those with adjusted gross income over $75,000 or $150,000 for joint filers. For taxpayers over those limits, the old child tax credit of $2,000 per child still applies.

The ARPA also called for 50% of the credit to be paid in advance for the expected 2021 CTC, based on 2020 income tax filings. These payments started in July and will be evenly spread over the six months from July through December 2021. If you received the credit last year, you likely already received a notice from the IRS and started receiving the payments. The IRS online portal allows you to manage the advance monthly CTC payments. You may “opt-out” of receiving the advance payment credit or update bank account information for monthly payments via the portal.

Aldrich’s Advice

If your gross income is over the threshold limits and you do not opt-out, receiving these monthly payments may increase taxes due or reduce refund amounts in April. We recommend opting out of the advance payments if you do not currently have a financial need—or be ready for a smaller refund in April.

Child and Dependent Care Tax Credit Increase

The ARPA also increased the amounts for the child and dependent care credit. The expansion is currently for the tax year 2021 only. For 2021, the credit is fully refundable, with the maximum credit percentage of qualifying expenses increased from 35% to 50%. The credit allows up to $8,000 in expenses for one child/disabled person (up from $3,000 in prior years) and $16,000 for more than one (up from $6,000).

In addition, the child and dependent care credit will be allowed for families making less than $125,000 a year without any phase-outs (instead of $15,000 per year). After that threshold, the credit starts to phase out. However, all families making between $125,000 and $438,000 will receive at least a partial credit.

Aldrich’s Advice

If you have any child or dependent care expenses, make sure to track the amounts paid by the child or dependent care provider and provide them to your advisor.

Recovery Rebate Credit – 3^rd Stimulus Payment

Earlier in 2021, the federal government issued the third round of stimulus checks for up to $1,400 ($2,800 if married filing jointly) plus $1,400 for each qualifying dependent. The payments started to be reduced for joint filers with adjusted gross income (AGI) above $150,000 and single filers with an AGI above $75,000.

Aldrich’s Advice

When filing a 2021 return, you will need to provide the amount of your third stimulus check to determine how much of the recovery rebate credit is available. If you did not receive a third stimulus check but were eligible for one based on 2021 income, you can claim the credit as part of your return.

Required Minimum Distributions

Seniors were allowed to skip their RMDs in 2020 without penalty. However, there is no waiver for the RMD for 2021. As a result, anyone at least 72 years old by the end of 2021 must take an RMD to avoid the 50% penalty.

Aldrich’s Advice

If you typically pay quarterly estimated tax payments, watch out for taxes owed in April due to increased income in 2021 over 2020.

Maximize Charitable Contributions

For the 2020 tax year, a new above-the-line deduction was allowed for up to $300 of charitable cash contributions, even if you claimed the standard deductions on your tax return. The write-off was extended to 2021 with one enhancement. For 2021, one deduction is allowed per person, which allows married couples to deduct up to $600 on a joint 2021 tax return.

The 2020 suspension of the 60%-of-AGI limit on cash donation deductions for those who itemize was also extended through 2021.

Aldrich’s Advice

Even if you typically do not itemize, provide any charitable contributions to your advisor to determine if you qualify for the deduction.

Also, if you had a significant spike in income this year, consider setting up a donor-advised fund (DAF). You can contribute a large amount to the fund in the current year to maximize the charitable deduction against the high-income year and over the ensuing years. You can also direct the fund to make contributions from the fund directly to the charity.

In addition, to minimize your AGI and tax liability, you can donate appreciated stock to a charitable organization or DAF. The charitable deduction will be at fair market value, and you won’t pay capital gains on the appreciation. Current year deductions are limited to 30% of AGI for donations of appreciated assets to donor-advised funds.

Cryptocurrency Transactions

Throughout 2021, the world has seen the rise, fall, and multiple evolutions of virtual currencies and virtual assets supported and based upon blockchain technology. Collectively, these are referred to as “digital assets.” The most widely recognized digital asset, Bitcoin (BTC), hit record highs in January, February, March, and April, with its peak being just over $64,000 per coin in April.

As virtual currency grows in popularity, the IRS is expanding its examination of these assets and transactions. Beginning in 2019, the IRS began requiring taxpayers to affirmatively note if they had disposed of virtual assets; this question will continue to be on the 2021 Form 1040. Additional legislation is being drafted in conjunction with other economic packages concerning cryptocurrency. It may have sweeping ramifications for businesses using digital assets in their day-to-day operations and brokers tracking the sales for their customers.

If you’re interested in mining cryptocurrencies or supporting blockchain via proof of stake or work computations, there may be associated business income subject to self-employment and income taxes. The continued evolution in decentralized finance may lead to an increase in complex transactions. This creates an emphasis on record-keeping. Similar to acquiring and disposing of stocks, digital assets should be managed carefully. Many third-party sites offer programs to track and compute unrealized gains and losses and manage transfers between wallets. By using these types of tools, you can evaluate your positions and make informed decisions.

Aldrich’s Advice

If you invest in digital assets, we recommend managing capital gains by harvesting losses. Since digital assets are classified as property for tax purposes, wash sale rules do not apply when selling positions at a loss. Thus, you may sell a digital asset in a loss position to offset recognized gains from earlier in the year and have a smaller net taxable gain between the transactions.

Additionally, investors should determine where virtual assets are located, especially if any are in foreign accounts. Digital assets housed outside of the US may be subject to foreign income regulations or accounting reporting rules. Regulatory compliance for these assets can be complex, and the associated penalties are steep. Additional foreign reporting may apply, depending on the maximum value of your account during the year, or as of December 31, 2021.

Reach out to your Aldrich Advisor to discuss the implications of cryptocurrencies and learn more about how these investments might affect your taxes now and in the future.

Student Loan Repayment

As the COVID-19 pandemic began last year, the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act gave a reprieve to borrowers as unemployment, and forced economic shutdowns became prevalent. Under the CARES Act, federal student loans were put into a suspension of payments with a 0% interest rate through January 2022 (after extensions). Additionally, any collection on defaulted loans was put on hold.

Individuals may be able to claim up to $2,500 of qualified student loan interest expense as an above-the-line deduction from income on their 2021 tax return. Interest payments that qualify for this deduction are related to loans issued to you, your spouse, or your dependents to pay for qualified education expenses while the student was attending school at least half-time.

The deduction may be limited depending on your tax filing status and modified adjusted gross income (MAGI). For married filing joint taxpayers, the deduction begins to phase out at $140,000 of MAGI, and the deduction is fully phased out at $170,000 (2020). For all other tax filings, except Married Filing Separate, the phase-out begins at $70,000 and is fully phased out at $85,000 (2020). Those whose filing status is Married Filing Separate are unable to claim this deduction, regardless of MAGI.

Aldrich’s Advice

To maximize this deduction before the end of the year, consider paying off any additional accrued interest, up to $2,500, if your MAGI is below the thresholds. Loan servicers will apply any payments to accrued interest before principal. This deduction applies to interest paid on both federally and privately held loans.

If you have federally held debt, you will want to stay tuned to hear about additional repayment suspension or outright debt forgiveness. While the suspension of payments is active, you can hold off on making payments without detriment. As it stands, the final extension for the suspension ends on January 31, 2021.

Though this additional cash flow can be helpful in a pandemic, you should know that any deferred payments will ultimately extend the life of the loan. During deferment, it may be an excellent time to consider using the additional cash to pay down other high-interest debt, start/increase your emergency fund, or earmark the cash to be available to service the original loan. Paying off the original debt with 0% interest can be a great way to reduce the long-term interest expense of your student loans.

Estate and Gift Tax Updates

Taxes are a focal point for the Biden administration and lawmakers in Congress, including estate and gift tax exemptions. The current lifetime exemption of $11.7M is in jeopardy of being significantly reduced, with a projected effective target date of December 31, 2021. The uncertainty may have you feeling pressured to make significant gifts before year-end—use it or lose it before the shift occurs.

Considering the potential changes, it is vital to keep a few things in mind before making large gifts.

Start with a comprehensive financial plan to ensure your remaining financial resources will allow you to live comfortably after making a gift. Once you gift, you can’t get those assets back, even if you have a change in financial circ*mstances later. The financial plan should help guide you on how much, if any, you can give away.

Once you determine the gift amount, avoid triggering 2021’s gift tax if your total lifetime transfers inadvertently exceed the threshold of $11.7M per person.

• Communicate all prior-year lifetime taxable gifts to your estate planning team that have reduced the lifetime exemption. This includes reported and unreported gifts.
• Indirect gifts, which include supporting an adult child, paying life insurance premiums for insurance owned by a trust, birthdays, vacations, zero-interest loans, and even forgetting to take required distributions out of a trust each year, can add up. These must be accounted for and included in your annual gift reporting.
• Valuations of business interests or other hard-to-value property transfers should be performed by qualified business and property appraisers. Trying to save on appraisal costs could cause you headaches later when filing the gift tax return.
• Have your tax advisor help you decide which assets might be the most tax-efficient to gift.

Other pending changes to the estate and gift tax law could affect your decision to gift. Currently, these estate planning techniques are still valid and can accomplish tax-efficient transfers of wealth.

• Intentionally Defective Grantor Trusts (IDGT) is an effective tool for making a part gift and part sale of an asset while maintaining some cash flow after completing the transfer. Low-interest rates and valuation discounts can help transfer more value and future asset appreciation to your beneficiaries.
• Spousal Lifetime Access Trusts (SLAT) is also a great way to make a large gift to your spouse and have a failsafe for them to access the trust funds.

Consider using other techniques to transfer wealth without affecting your lifetime exemption. These strategies do not count as a taxable gift but can transfer considerable wealth over time:

• Annual exclusion gifts of up to $15K per person.
• Making direct payments to medical providers for medical bills or qualifying educational institutions for grade school through higher education.
• Making low-interest loans using the IRS’ Applicable Federal Rates for the term of the loan.
• Selling your business or other property to your children at today’s value on a low-interest loan using AFR rates—can effectively freeze the value for estate tax purposes and still provide you a stream of income.

Aldrich’s Advice

We recommend maintaining detailed records around your gifting activities and working with a trusted advisor to develop a financial plan. Take advantage of the current tax environment for significant gifts and, at minimum, evaluate wealth transfer options that will not affect your lifetime exception amount. When making large gifts, your goal should be obtaining the best (and lowest possible) value while feeling confident that the valuation will be defensible should the IRS decide to take a closer look.

Gifting requires careful planning and consideration. If you are thinking about gifting, take the time to meet with our Trusts and Estates Team to ensure your estate and gift tax plans are appropriately executed and ensure your strategy is relevant for the current tax year.

Portland Metro Tax Update

Metro Income Tax

For 2021, there is a new income tax for the Portland Metro area. It is a 1% tax on income for those in Clackamas, Multnomah, and Washington counties. Individuals living in one of these three counties will owe a 1% tax on taxable income over $125,000 for single filers or $200,000 for those married filing jointly.

You will also owe the 1% tax on metro-sourced income above those thresholds if you live outside of but work within the metro area.

Multnomah County Income Tax

Multnomah County individuals have a personal income tax starting in 2021. The tax rate will range from 1.5 to 3% based on income levels for individuals living in the county. For nonresidents of Multnomah County that work or have sourced income from inside the county, you will also be subject to the tax.

Income over $125,000 single and $200,000 married filing jointly will be subject to a 1.5% tax on income over those thresholds. This rate would increase to 2.3% in 2026. Income over $250,000 single and $400,000 married filing jointly will be subject to a higher tax rate of 3% on income over those amounts. For county residents, this tax will be in addition to the Metro income tax.

Aldrich’s Advice

If you live in the Portland Metro area and your tax liability is affected by these new mandates, consider working with your tax advisor to explore ways to save and prepare for these taxes. We recommend working closely with your trusted advisor to identify deductions and credits to reduce your bill.

Proposed Tax Changes in 2022

The Biden administration has proposed several changes to the current tax code. In mid-September, the Ways and Means Committee advanced a tax plan that followed the administration’s proposals in some areas and strayed in others.

Please note that these are only proposals and not part of a final bill. The majority of the changes would not be effective until 2022.

Highlights of the proposed changes include:

• Increasing income tax rate of high-income individuals from 37% to 39.6%.
• Adding a new 3% surcharge on MAGI over $2 million.

• Increasing long-term capital gains and qualified dividends to 25% from 20%

• Gifting limits dropping to $5 million per individual, accelerating this change from 2026 to 2022.
• Closing the ability for backdoor Roth conversions in 2022.
• Limiting investments types IRAs can own.

Aldrich’s Advice

House Democrats released their proposal for tax changes in September with expected conversations and passage of some version of a tax bill before year-end. There may be some planning opportunities to move income or deductions from one year to another and/or other options. As more definite information is available, we will provide updated recommendations or suggestions.

As a reminder, we recommend keeping all relevant tax documents on hand for a minimum of seven years. You can find a detailed chart with record retention best practiceshere.

We know your challenges are unique, and we have the expertise to guide you in the right direction. Even as uncertainty follows us into 2022, we’ll be alongside you, helping you achieve your goals. Reach out today to schedule a meeting to discuss your 2021 tax plan.

This year-end tax planning guide is based on the prevailing federal tax laws, rules, and regulations. It is subject to change, especially if Congress enacts additional tax legislation before the end of the year. Your personal circ*mstances will likely require careful examination.

This guide was written with the most current information as of October 1, 2021. Continue to check back for further updates or changes.