Wright Financial Group, LLC

Tax Center

Tax Center

A Few Words About Us

Year-End Tax Planning Basics

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Nobody wants to pay the government any more in taxes than legally required!

Tax planning means taking advantage of every strategy, deduction, and credit that the taxpayer is entitled to claim, in order to help minimize their federal and state tax liabilities.  However, the window of opportunity for most tax-saving moves shuts on December 31st of each year.

Tax Tips

Timing Is Everything

Consider any opportunities you have to defer income to 2022.  For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services.  Doing so may allow you to put off paying tax on the income until next year.  If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could also mean paying less tax on the income. Similarly, consider ways to accelerate deductions into 2021.  If you itemize deductions, you can accelerate some deductible expenses like medical expenses, qualifying interest, state income taxes, or local income and property taxes by making payments before year-end.  Or, you might consider making next year’s charitable contribution this year instead.

What if You’ll be in a Higher Tax Bracket in 2022?

If you know that you’ll be paying taxes at a higher rate in 2021 (say, for example, that an out-of-work spouse will be reentering the workforce in January), you might take the opposite tack. Consider whether it makes sense to try to accelerate income into 2021, and to postpone deductible expenses until 2022.

Factor in The AMT

Make sure that you factor in the alternative minimum tax (AMT). This “ghost tax” has been around for many years and was originally intended to make wealthy folks pay at least a minimum amount of tax.  However, due to the way it was originally structured, more and more individuals are subject to AMT in recent years.

If you’re subject to AMT, certain traditional year-end maneuvers, like accelerating deductions, can have a negative impact on your tax liability.  That’s because the AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions.  For example, if you’re subject to the AMT in 2021, prepaying 2022 state and local taxes won’t help your 2021 tax situation and could hurt your 2021 bottom line.

AMT Triggers:

You’re more likely to be subject to AMT if you claim a large number of personal exemptions, have large deductible medical expenses, pay a lot of state and local taxes, or have substantial miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren’t used to buy, build, or improve your home, and the exercise of incentive stock options.

The Landscape Has Changed For Higher-Income Individuals

Individuals will pay federal income taxes for 2021 based on the same federal income tax rate brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) that applied for 2020. The same goes for the maximum tax rate that generally applies to long-term capital gains and qualifying dividends (for those in the 10% or 12% marginal income tax brackets, a special 0% rate generally applies; for those in the 22%, 24%, 32%, and 35% brackets, a 15% maximum rate will generally apply). For 2021, the 37% federal income tax rate applies if your taxable income exceeds $523,600 if single ($628,300 if married filing jointly, $314,150 if married filing separately, $523,600 if filing as head of household). If your income crosses these thresholds, you’ll also be subject to the 20% maximum tax rate on long-term capital gains and qualifying dividends.

However, you could still pay more in taxes, even if your income doesn’t reach 37% tax bracket level. That’s because, if your adjusted gross income (AGI) is more than $523,600 if single ($1,047,200 if married filing jointly, $523,600 if married filing separately), your personal and dependency exemptions begin to phase out, and your itemized deductions may be limited. In addition, the 3.8% Net Investment Income Tax generally applies to some or all of your net investment income if your modified adjusted gross income exceeds $200,000 if single, $250,000 if married filing jointly and $125,000 if married filing separately.

The combined effect of all these taxes and complexities means that high-income earners with substantial investments can pay federal taxes at a marginal tax rate well in excess of 40%!! This makes consulting with a professional tax adviser even more important for these folks.

IRAs and Retirement Plans – A Key Part of Planning

Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans, such as 401(k) plans, allow you to contribute funds pretax, reducing your 2021 taxable income. Contributions you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2021, but qualified Roth distributions are tax-free—making these retirement savings vehicles very appealing. For 2021, you can contribute up to $19,500 into a 401(k) plan ($26,000 if you’re age 50 or older), and up to $6,000 to a traditional IRA or Roth IRA ($7,000 if age 50 or older). The window to make 2021 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your 2021 federal income tax return to make 2021 IRA contributions.

Required Minimum Distributions:

Once you reach age 72, you’re generally required to start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the required withdrawals by the date required–the end of the year for most individuals–or a 50% penalty tax applies.

Tax Calendar

Tax planning is an activity that is best pursued year-round. You can use the following list of activities and dates to help you better carry out your planning on a regular and ongoing basis. The dates below are the same each year unless the date falls on a weekend or holiday, in which case the due date is the following business day.


First Quarter

  • If you work for tips and earn more than $20 in tips during the month, report tips to your employer by the 10th of each month for the following month on Form 4070.
  • Complete Form W-4 and adjust withholding if needed.
  • Pay fourth-quarter estimated tax voucher for the preceding tax year by January 15.
  • Evaluate before-tax contributions to retirement plans.
  • Evaluate voluntary after-tax contributions to retirement plans.
  • Apply for a Social Security number for any child who does not have one.
  • Make quarterly defined benefit Keogh contribution for preceding year by January 15.
  • If you claimed exemption from withholding last year, you must file a new W-4 form with your employer to claim the exemption for this year.

second Quarter

  • Comply with minimum distribution rules for qualified plans by April 1 if you attained age 72 in previous year and did not take the distribution by December 31 of that year.
  • File your individual tax return (or an application for an extension of time to file) by April 15.
  • Pay first-quarter estimated tax, using the correct voucher, by April 15.
  • Make your previous-year IRA contribution by April 15.
  • Make previous-year Keogh plan contribution by April 15 (unless you applied for an extension of time to file your tax return).
  • Make your quarterly defined benefit Keogh contribution for the current year by April 15.
  • Pay second-quarter estimated tax voucher by June 15. 2

Third Quarter

 Make quarterly defined benefit Keogh contribution for the current year by July 15.

  • File Form 5500 Annual Report of Employee Benefit Plan by July 31, if applicable.
  • Pay third-quarter estimated tax voucher by September 15.

Fourth Quarter

  • If you applied for a six-month extension of time to file your preceding year’s tax return, file the return by October 15.
  • Make your quarterly defined benefit Keogh contribution for the current year by October 15.
  • Begin your year-end planning.
  • Evaluate the applicability of the AMT and other taxes.
  • Adjust withholding, if necessary.
  • Evaluate year-end capital transactions.
  • Establish a separate Keogh plan for self-employment income.
  • Comply with minimum distribution rules for qualified plans.

Throughout The Year

  • Evaluate your tax and financial strategy for receiving discretionary and mandatory retirement plan distributions.
  • Re-evaluate your uses of debt.
  • Consider making gifts to children or other family members up to the annual gift tax exclusion of $15,000 per gift per donee per year.
  • Evaluate passive loss exposure and potential investment shifts.
  • If you have excess cash flow, consider how to invest those funds.
  • Optimize mix of interest expense items.
  • Consider making charitable contributions of property, instead of (or in addition to) giving cash.
  • Consider ways to fund your children’s education.
  • Evaluate your mix of portfolio and passive income.
  • Review prior gifts to children under age 14 and their incomes in order to minimize the amount of income that will be taxed at your rate (the “kiddie tax”).
  • Review the selection of your second residence and status of your vacation home.

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