Visit FedSmith.com to subscribe to our free email list!

2021 Tax Planning Checklist

These are some important considerations in doing tax planning for 2021.

Last year was one for the history books. It was nothing short of eventful, and left many people confused about all of the changes that took place.

A pandemic swept across our nation, leading to a quarantine that tested and shook our economy. The government responded with significant amounts of stimulus and legislation. Mixed in was a presidential election and several changes to the tax code and retirement planning.

Here’s a look at what you may need to be thinking about as you’re doing tax planning for this year.

Retirement Contributions

Traditional IRA

Contributions to your Traditional IRA can be made until April 15 to count for 2020, the limit is $6,000 ($1,000 catch-up for those over 50). Be careful with the deductibility of Traditional IRA contributions, be aware of the rules around that, especially if you’re filing your own taxes.

Roth IRA Considerations

Remember your contribution toward your Roth IRA counts toward the overall $6,000 total for IRA accounts but can still be made up until April 15, 2021, and still be treated as a 2020 contribution. There are income limitations for Roth IRA contributions, but not for the Roth TSP.

Roth Conversions

You may want to consider Roth conversions if you believe you’ll be in a higher bracket in the future. Perhaps you are retired or only working parttime, years with low income may be good years for conversions into money that grows tax-free. You cannot convert your Traditional TSP, but Traditional IRA monies are eligible.

Thrift Savings Plan

Your 2021 contribution limit is $19,500 for TSP salary deferrals ($6,500 catch-up for those over 50), so plan your TSP withholdings accordingly this year. Make a habit to increase your TSP contributions by 1% each year if you can.

Charitable Giving

Qualified Charitable Distributions (QCD)After age 70.5 you can send distributions from an IRA directly to a qualified charity. By doing this QCD, the distribution may qualify and count towards your RMDs but will not be treated as taxable income. If you’re charitably inclined and of proper age, consider utilizing this strategy to meet both goals simultaneously. Individuals may distribute up to $100,000 in a year using this strategy. Consider this for 2021 as RMDs return.

Qualified Charitable Cash Donations

Qualified charitable cash donations up to $300 can be deducted as an above the line deduction per the CARES Act for 2020. This was extended for 202. Single filers can deduct up to $300 and married filing jointly can deduct $600 for cash gifts to charity in 2021.

Non-Profit Donations

Maintain records of donations made to non-profits. Keep good records, they may help offset your taxes.

Charitable Remainder Trusts

Charitable remainder trusts are a tax-exempt way to leave assets to beneficiaries for a certain period of time before giving the rest to charity. Work with the proper professionals to help make sure you’re taking full advantage of the tax opportunities.

Income Tax

Tax-Loss HarvestingTax-loss harvesting is a strategy in which investors sell low-performing, taxable investments and use the losses to offset gains, thereby lowering their taxable earnings. If you’re facing a year with high income or you had significant losses, you may want to consider this strategy. Many harvest portfolio losses towards the end of the year, but you should be considering these opportunities throughout the year.

HSA

A Health Savings Account (HSA) is a tax-advantaged account used to pay for qualified health care needs. HSAs can be used as long-term investment vehicles so you can save for retirement health care costs in a tax-advantaged manner. You need to be enrolled in a high deductible health care plan to be eligible to contribute.

529 Plans

A 529 is a tax-advantaged savings plan that can be used for qualified educational expenses. Money that goes into a 529 is deductible in most states, and you can fully fund 529 plans for yourself, kids and grandkids, and other family. Check with your state to see what the rules are for tax benefits in your state. Be careful though, distributions from 529s must be qualified or face a penalty.

Estate Planning and Transfers of Wealth

$15,000 annual gift tax exclusion

This is the amount a person can give away every year without incurring taxes. Speak with your advisors about using this exclusion strategically in your estate plan. Be careful not to confuse this with the lifetime gift tax exemption.

Lifetime Exemption Amount/Estate Exemption Amount

This is set at $11.7 million for 2021, which is a total of lifetime and estate. If your estate exceeds this amount, it may incur estate taxes which are up to 40%. 

Wills and Trusts

Tax season is a great time to double check the details of your Wills, Trusts, beneficiaries, etc., especially with the SECURE Act and its complexities surrounding retirement accounts and the new RMD timelines. Read up on the SECURE Act.

New Tax Concerns for 2021

Inherited Accounts

The SECURE Act requires many inherited retirement accounts to be fully depleted in 10 years. 2020 was the first year these new rules started to apply, so 2021 is the first year in which the 10-year SECURE Act clock starts to run. Make sure this is accounted for in your financial plan. 

Required Minimum Distributions Will Start Back Up

If you are of RMD age (72) or were previously at the lower age of 70.5, these distribution requirements will be in place again. Inherited accounts will also continue having its requirement. 

Coronavirus-Related Distributions

The CARES Act included favorable tax provisions for most types of TSP withdrawals and other retirement accounts made by participants affected by COVID-19. It also created a new, temporary withdrawal option that waived the usual in-service withdrawal requirements and allowed all COVID-affected participants to waive tax withholding. This was an aggregate amount up to $100,000 taken within the calendar year of 2020, but you may be able to retroactively apply for the exception if you took a distribution in 2020 and met the other qualifications. 

Expanded Retirement Plan Loans

Loan provisions from retirement plans have been relaxed considerably for those in qualified disaster areas or experiencing a loss from the disaster (meant to include COVID and other disasters). They also allowed COVID-affected TSP participants to suspend TSP loan payments for the year 2020 and doubled the allowable loan amount. The deadlines for the increased loan maximum, for suspending loan payments, and for taking withdrawals that are covered by the CARES Act have passed. If you took a withdrawal from your TSP account in 2020, you may want to review information about the favorable tax treatment provided by the CARES Act, including whether your withdrawal is eligible and, if so, how to take advantage of it.

If you’d like a short, free e-book that dives a bit deeper on some of these topics, send us an email to [email protected] and mention “e-book” in the subject line. Happy planning!

Tax laws source: irs.gov

About the Author

Thiago Glieger, AIF®, ChFEBC℠ is a Director and advisor at RMG Advisors, a premier private wealth management firm in the Washington, DC metro area. As fiduciaries, he and his team have served federal employees for over 40 years by helping them grow, manage, and protect their wealth. Their program, The Fed Corner, produces content specifically designed to help federal employees make better financial decisions.