Year-End Financial To-Do: Take or Defer Gains and Deductions

Dec 22, 2021

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies

Print This Post Print This Post

It’s nearing year end, and while you may be looking forward to a fabulous New Year’s celebration, remember the tax man comes calling next year as well! Accordingly, now is a good time to review your tax situation for opportunities to pay less taxes or pay taxes at a lower rate. Markets have been pretty strong this year. As such, consider reviewing your portfolio, other investments and your projected income to see where you may find yourself on the tax bracket spectrum. Once you’ve estimated where you are, work with your tax advisor to see whether you should take or defer certain gains or deductions in this year or the next.

For example, you may be able to take a gain on an investment this year or postpone it until January. If you think your tax rate will be lower next year, it may make sense to postpone the gain until 2022.  Similarly, if you are considering making a charitable donation and you expect your income (and tax rate) to be lower next year, consider making the donation this year to offset your higher tax rate for this year. If you pay state estimated taxes, you could make your last quarterly payment in December rather than January to take the deduction this year. Ultimately, if you can control when to take a gain or deduction, choosing the appropriate time to take such actions can help you control your potential tax liability year over year.

These techniques are especially critical to review given the large standard deductions currently in place. Recall that the standard deductions are $12,550 for filing single and $25,100 for married filing jointly for tax year 2021. Itemized deductions remain limited as well. Charitable gifts, mortgage interest and state and local taxes (with a cap on state and local deductions being $10,000) comprise most itemized deductions. That said, the Coronavirus Aid, Relief and Economic Security (CARES) Act does provide some unique charitable opportunities for 2021.

First, if you itemize, for this year only, you can deduct up to 100% of your adjusted gross income for cash gifts to qualified charities (typically the limit is 60% of your AGI).  However, if you gift assets, traditional rules apply and the deduction is limited to 30% of your adjusted gross income. Another change from the CARES Act is that even those who do not itemize may take a charitable deduction this year. Specifically, standard deduction filers may take an “above the line” deduction of $300 for single filers, $600 for married filers for contributions to public charities. Being above the line means you deduct this amount before calculating your AGI, an impactful deduction. Given these factors, reviewing whether to take or defer gains and losses is critical.

These are complicated and time sensitive decisions. Please remember Benjamin F. Edwards does not provide tax advice, so it is important to consult with your tax professional for guidance tailored to your specific situation. Doing so may lessen the tax blow for this year and the year to come.