Wealth Planning

Key Year-End Planning Considerations


By Jody R. King, JD, CPA

Vice President & Director of Wealth Planning

2022 Clock

November 24, 2021

As we reflect back on 2021 and look forward to 2022, this is an opportune time to reassess your tax and financial circumstances while taking control of your finances. While there is still uncertainty regarding the tax law changes proposed under the Build Back Better (BBB) Plan, the following 12 year-end planning tips can still be taken into consideration over the next few weeks.

1. Recognizing Losses and Taking Gains

Year-end is an opportune time to consider revisiting your capital gains budget for the year, especially in light of the equity markets’ success and recent volatility. In most years, if your portfolio contains unrealized losses, it can make sense to recognize some of those losses to decrease your overall capital gains tax burden. Recognizing capital losses to offset recognized capital gains, referred to as “loss harvesting,” is an important strategy to consider at year-end. Although it does not appear that capital gains tax rates will be higher in 2022, you may want to consider if there are reasons to delay loss recognition until next year. This could certainly be the case for larger irrevocable trusts who may have modified adjust gross income (MAGI) in 2022 that is over either the $200,000 or $500,000 level, which would trigger an additional surcharge if currently proposed legislation is enacted.

2. Roth Conversions

Although it may never seem like an appropriate time to pay additional ordinary income taxes, paying taxes currently to convert all or part of your traditional IRA or previous employer 401(k) accounts to a Roth IRA is something to consider. If you believe you will be subject to higher tax rates in the future, you may be better off converting some or all of your traditional IRA to a Roth this year. In exchange for paying taxes today on amounts converted, Roth IRA assets grow tax free and unlike traditional IRAs are not subject to RMDs, which generate ordinary income during your lifetime. Over an extended period of time this benefit can be significant, especially in a higher income tax rate environment. Since Roth IRAs benefit from tax-free growth, they can be most compelling for younger individuals or those who have a longer time horizon for when they will need to access the funds, but can also make sense for those who have taxable estates. Additionally, a Roth IRA creates an income tax-free asset that can pass to heirs if the assets are not needed during your lifetime. Year-end is an excellent time to review your projected ordinary income for the year and understand the projected tax impact of any conversions based on where your actual taxable income falls within the marginal tax brackets structure. As a reminder, it is most compelling to pay the tax liability associated with a Roth conversion from assets that are not being converted in order to maximize the amount in the Roth IRA and benefiting from tax-free growth. Please note that Roth conversions can no longer be recharacterized, or reversed, once completed.

Currently proposed legislation could have major impacts on Roth conversions. If enacted, the window for individuals who have made after-tax contributions to their traditional IRA, either as a part of a tax-advantaged savings strategy or as part of a backdoor Roth conversion, may no longer be able to perform Roth conversions beginning with the 2022 tax year. As a result, if you have after-tax amounts in your IRA, you should immediately consult your advisors to determine if you should initiate a Roth conversion during 2021. In addition, proposed legislation would broaden distribution requirements, regardless of age, for those with retirement assets above a $10 million threshold.

3. Ordinary Income

Traditional year-end advice is to delay the recognition of income to the next year, if legally possible, in order to delay the payment of income taxes associated with it. There are noteworthy exceptions to that traditional advice as 2021 rolls to 2022. The first is related to the proposed broader application of the 3.8% Net Investment Income Tax (NIIT) and the second is for those who would be subject to the proposed surcharges related to certain income levels.

The proposed BBB legislation expands the application of NIIT in 2022 to apply to trade or business income reported on an individual’s income tax return if MAGI exceeds $400,000 for an individual or $500,000 for married filing jointly (MFJ). The NIIT would be applied to all trade or business income reported on a trust or estate tax return.

The second reason to accelerate income into 2021 is the proposed 5% tax surcharge for taxpayers with MAGI over $10 million and an additional 3% surcharge (8% total) for those with MAGI over $25 million. The surcharge thresholds, however, are much lower for irrevocable trusts and estates, with the 5% surcharge applying to MAGI over $200,000 and the additional 3% surcharge applying over $500,000.

4. Itemized Deductions or the Standard Deduction

Due to the increases in the standard deduction and limitation of the deductibility of state and local taxes (SALT) in The 2017 Tax Cuts and Jobs Act fewer taxpayers are itemizing deductions on their individual income tax returns. This however, may change in 2021 in light of proposed legislation under BBB that would increase the available SALT deduction from $10,000 to $80,000. For 2021, the current standard deduction is $25,100 for a couple that is MFJ, $18,800 for head-of-household, and $12,550 for other individuals. In order to benefit from itemizing, deductions must exceed the appropriate standard deduction amount. Beyond the SALT deduction, the additional amount to reach the itemization threshold can be a combination of deductible medical, charitable, and mortgage interest amounts. Even if the SALT deduction is increased and more taxpayers will be itemizing, the actual financial benefit from this increased deduction may be dampened by the Alternative Minimum Tax (AMT). Regardless, remember that home equity interest is only deductible if the loan proceeds were used for residential acquisition or capital improvements, and are subject to the overall home loan debt limit of $750,000 for residential debt incurred after December 15, 2017, and $1 million for pre-existing debt. The threshold for deducting medical expenses is 7.5% of adjusted gross income (AGI) for 2021.

5. Philanthropy

Under current law, if you will not be itemizing in 2021, you can make a $300 charitable cash contribution directly to a charity to receive an “above-the-line” deduction resulting in a reduction of your AGI.  This amount is doubled to $600 for couples MFJ. In addition, if you are over age 70½, you can make qualified charitable contributions (QCD) from your traditional IRA of up to $100,000 directly to a charity. QCD amounts count as part of any required minimum distribution (RMD) for the year and do not result in taxable income to the IRA owner. QCDs cannot be made to donor-advised funds or most private foundations.

Although donations of appreciated securities held for more than one year continue to be a tax-advantaged way to make charitable gifts, the CARES Act presents a new opportunity where up to 100% of AGI can be deducted when cash-gifting strategies are utilized. This enhanced deduction limit is not available for gifts to donor-advised funds or supporting organizations, which are still limited to 60% of AGI for cash gifts and 30% of AGI for appreciated securities.

If you are itemizing this year but may not be in future years, consider “gift bunching” by accelerating what would be your 2022 or later years’ charitable gifts to 2021. If you are not ready to have the amounts gifted pass to charities immediately, you could also consider contributing to a donor-advised fund, which may allow you to receive the current-year tax deduction while retaining the flexibility to request that the donated funds be distributed to qualified charities during future years.

Learn More: “Minimizing Taxes with Charitable Gift Bunching”

Learn More: “Fiduciary Trust’s Donor-Advised Fund Program”

As always, it is important to consider the various AGI percentage limitations that apply to the charitable deduction in planning your charitable giving.

6. Tax Projections and Estimated Tax Payments

Review your 2021 income and itemized deductions to be sure that you have paid in sufficient amounts, either through withholdings, estimated tax payments, or prior year refunds carried forward, to avoid tax penalties. If you are planning to make estimated tax payments, the fourth quarter 2021 payments are due on or before January 18, 2022. If you would like your fourth quarter state or local tax payment to be included in your 2021 itemized deductions, then those payments must be postmarked before year-end.

7. Fully Fund Your 401(k)

While working, it is advisable to fully fund your 401(k) or similar retirement plan each year. Doing so will benefit you in the long run by maximizing retirement savings that grow either tax-deferred or tax-free and may help decrease your current tax liability. Even if your cash flow will not allow you to fully fund your plan, making contributions to at least maximize any available employer matching program is compelling. Maximum 401(k) contribution limits are $19,500 for 2021 and $20,500 for 2022, with those who are over age 50 allowed to contribute an additional $6,500. Depending on your situation, you may want to consider taking advantage of a Roth 401(k) feature if offered by your employer. Utilizing a Roth 401(k) will likely result in higher current income taxes, but will provide you with tax-free, as compared to tax-deferred, appreciation on any retirement savings contributed to your Roth 401(k).

If you do not have a 401(k) or are already fully funding your 401(k), consider funding an IRA. The $6,000 IRA contribution limit will apply for both 2021 and 2022, with an additional $1,000 contribution allowed in both years for those over age 50 by year-end. A non-working spouse with an employed partner can also fund their own IRA, subject to taxable compensation requirements.

If you are eligible, consider funding a Roth IRA instead of a traditional IRA. Roth IRAs grow tax free and are not subject to RMDs, compared to traditional IRAs that grow tax-deferred and are subject to RMDs once you reach age 72. Please note that all 2021 traditional IRA and Roth IRA contributions must be made by April 15, 2022.

8. Annual Exclusion Gifts

If you have sufficient assets, and if transferring wealth to the next generation is a goal in your overall wealth plan, you should consider making annual exclusion gifts before year-end. Annual exclusion gifts can be a powerful wealth transfer technique over time. During 2021, an individual can give up to $15,000 to as many individuals as he or she chooses without utilizing any of his or her federal lifetime gift and estate tax exemption amount (currently $11.7 million.) That $15,000 combines to $30,000 for married couples who either make separate gifts or choose to “gift split.” Beginning in 2022, the annual exclusion amount will increase to $16,000 or $32,000 for married couples who gift split.

Contributions to a Section 529 Plan for education can be made with annual exclusion gifts. In fact, you can front load a 529 Plan and elect to spread the gift ratably over a five-year period when you file your gift tax return. If you have a 529 Plan and have incurred unreimbursed qualified educational expenses, you should request reimbursement from the plan before the end of the year. Also remember that up to $10,000 of elementary and secondary school tuition costs can be reimbursed from a 529 Plan each calendar year.

Learn More: “Paying for College”

In addition to the annual exclusion gifts noted above, an individual can also pay tuition expenses and qualified medical expenses directly to the provider without creating a taxable gift. Tuition includes the cost of education from preschool through graduate school, but does not include non-tuition charges such as room and board or books. Qualified medical expenses include health insurance premiums.

9. Wealth Transfer Beyond Annual Exclusion Gifts

If you have significant assets, you should establish a comprehensive wealth-transfer plan that incorporates asset transfers both during your lifetime and at your death. This plan can include outright gifts or loans to family members as well as to your philanthropic interests. If you plan to eventually transfer assets into irrevocable trusts, now may be an appropriate time to begin working with your advisors to draft a well-thought-out trust with appropriate parties named as trustees. The current $11.7 million lifetime gift and estate tax exemption includes $5.85 million of basic exemption and $5.85 million of “bonus” exemption, with the “bonus” portion scheduled to sunset on December 31, 2025. Legislatures have suggested rolling back the bonus exemption before 2025, but current proposed legislation does not make a change to this. Once again, continuing to keep an eye on political developments is recommended here as these amounts could be reduced before the current sunset timeline. With this in mind, it makes sense to establish a wealth-transfer plan, even if you choose not to execute it immediately, so that you are ready to move forward quickly if it does appear that the laws are likely to change, as it may be to your family’s financial benefit to transfer significant wealth this year under the known higher exemption amounts.

 Learn More: “Wealth Transfer in a Low Rate Environment”

10. Health Plan, Health Savings, Flexible Spending, and Other Elections

The open enrollment period for Medicare plans, as well as that for most employer-based benefits, often occurs during the last few months of a calendar year. Taking a moment to make sure your current elections are your best options for next year can be time well spent.

If you have a high-deductible health insurance plan, make sure you are fully funding your Health Savings Account (HSA). Funds put aside in an HSA do not need to be spent in that calendar year, but can instead be invested and used for future medical expenses. The HSA limit for 2022 is $3,650 for individuals and $7,300 for families. If you are over age 55, you can contribute an additional $1,000 whether for an individual or family HSA. Please note that if an individual is over age 65 and enrolled in any part of Medicare, he or she is not eligible to contribute to an HSA.

In addition to making contribution elections for 2022 for either Health and/or Dependent Care Flexible Spending Accounts (FSAs), you should review the funds remaining in your FSA account and submit the necessary receipts for qualifying reimbursable expenses. Some plans allow you to carry balances forward to the new calendar year for future expenses, but others do not. Amounts remaining beyond the allowable carryforwards will likely be forfeited, so it is important to properly manage both the use of funds currently in your FSA as well as elections for future contributions. Maximum contributions to a Health Care FSA and Dependent Care FSA for 2022 are $2,850 and $5,000, respectively. If you have an HSA, please also make sure your Health Care FSA is HSA-compatible. An HSA-compatible Health Care FSA will generally limit reimbursement to items related to dental or vision expenses.

11. Estate Planning Documents and Beneficiary Designations

Year-end is also a good time to review your estate planning documents, including your will, revocable trust, healthcare proxy, and durable power of attorney, to be sure that the trusted parties named in the documents are still appropriate to serve and that the document terms reflect your current wishes. In addition, it is a good time to review your beneficiary designations to make sure any IRA, 401(k), or insurance policies name your recipients of choice. You should consider whether changes to the inherited IRA payout rules warrant a change to either your beneficiary designations or to the terms of any trust that is named as the beneficiary of your IRA or 401(k). In addition, it is recommended that you request inforce illustrations for any permanent life insurance products that you may own, so you can review the financial health of your policies.

Learn More: “Naming a Trust as IRA Beneficiary”

12. Wealth Planning Checkup

Most families are not fully aware of how much they spend. Year-end is an excellent time to review annual credit card, bank, and other statements in order to understand your current spending and assess how that fits in with your overall financial health. If you have debt, year-end can be a great time to review how you are managing your debt. If you have significant upcoming expenses, such as college tuition, year-end is an appropriate time to make sure you are on track to meet your funding goals. It is also an appropriate time to review your credit reports from the three major credit reporting agencies and consider freezing your credit. We find that our clients benefit from working with us to establish a wealth plan. This is a good opportunity to gather information to facilitate the preparation of a plan, with the goal of creating a basis from which you can make informed decisions.

 Learn More: “Identity Theft: What You Don’t Know Can Harm You”

Learn More: “Wealth Planning: Is Your Financial House in Order?”

As you consider your year-end tax and wealth planning, we encourage you to consult with your tax advisor to review the specifics of your situation. As always, you should also feel free to discuss these planning opportunities with your Fiduciary Trust officer. Please contact us if you would like to be introduced to one of our officers.


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The opinions expressed in this article are as of the date issued and subject to change at any time. Nothing contained herein is intended to constitute investment, legal, tax or accounting advice, and clients should discuss any proposed arrangement or transaction with their investment, legal or tax advisers.

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