2021 Mid-Year Tax Planning For Individuals

Posted on Tuesday, July 20, 2021

As the recovery from the pandemic takes hold and the economy and life begin to return to a more recognizable form of normal, now is an ideal time to focus on tax planning for the remainder of 2021. There are many tax planning opportunities available to help you reduce your individual federal and state tax burdens, especially as Congress has enacted various provisions designed to help taxpayers recover from the COVID-19 pandemic. Here is a partial list of potential tax-savings opportunities for individuals to consider. 

Your 2020 tax return is a great starting point. Did you owe money to the IRS or a state or did you receive a big refund? The answer to this question may mean that you should look at your tax withholding and make adjustments to avoid a repeat in 2021. 

AGI

Because many tax benefits are tied to or limited by AGI — IRA deductions, for example — a key aspect of tax planning is to estimate both 2021 and 2022 AGI. Also, when considering whether to accelerate or defer income or deductions, be aware of the impact this may have on AGI and the ability to maximize itemized deductions that are tied to AGI. The 2020 tax return and 2021 pay stubs and other income and deduction-related documents are a good starting point for estimating your AGI. 

If you expect AGI to be higher in 2021 than in 2022 or anticipate being in the same or a higher tax bracket in 2021, you may benefit by deferring the receipt of income until 2022. Deferring income is advantageous so long as the deferral does not bump you into a higher tax bracket in the succeeding year(s). 

Itemized Deductions

If itemized deductions are relatively constant and are close to the standard deduction amount, little or no benefit will be gained from itemizing deductions each year. But simply taking the standard deduction each year means the loss of the benefit of itemized deductions that exceed the standard deduction. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of deductible expenses, i.e., “bunching,” so that they are higher in one year and lower the following year. This can be accomplished, for example, by paying deductible expenses in 2021, such as mortgage interest due in January 2022, and state estimated tax payments due in early 2022, or doubling up on charitable contributions every other year.

Investment Activities

The timing of your investment activities can result in significant tax consequences.  The timing of transactions generating capital gains and losses should be considered whenever possible. Attention should also be paid to the holding period of the investment as long-term capital gains (i.e., gains from assets held for more than one year) are taxed at preferential rates not exceeding 23.8%, whereas short-term capital gains are taxed at ordinary income tax rates. In fact, for taxpayers in the lower tax brackets, the federal tax rate on long-term capital gains can be as low as 0%!  To avoid recognizing capital gains altogether, you should consider donating appreciated property to charity rather than selling it, especially if doing so may result in overall itemized deductions exceeding your standard deduction for 2021. 

College Savings

A 529 plan allows you to save for future education expenses in a tax-advantaged savings plan.  Contributing to an Indiana College Choice plan can qualify you for a 20% credit, up to $1,000, on your Indiana return. 

These are just a few ways that you can make a meaningful impact on your 2021 tax bill.  For ideas specific to your individual situation, contact your DWD accountant. 

Contributed By: Mark Westerhausen, CPA | Tax Director | DWD CPAs & Advisors

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.