3 Tax Strategies for Mid-Year

by | Jul 27, 2021 | Asset Management

Tax planning is not something that only happens around tax season. There are tax strategies that can be implemented in the middle of the year too.

As is true with financial planning, tax planning is an ongoing process and not a one time event. Thankfully, there are still several months for you to set yourself up for a successful 2021 tax season.

Here are 3 tax strategies for mid-year that can help you prepare for the 2021 tax season.

3 Tax Strategies for Mid-Year

Retirement Plan Contributions

Now is a good time to review how much you’ve already contributed to your retirement plan. If you have a 401(k), 457 or 403(b) plan through your employer you are eligible to contribute $19,500 for 2021.

If you don’t have a retirement plan available to you through your employer, you can still save in a good old fashioned Individual Retirement Account (IRA). You are eligible to contribute $6,000 in 2021.

Are you on track to max out these accounts? An easy way to do this is to find your average contribution by dividing the amount you’ve already contributed by the amount of paychecks you’ve received YTD. And extrapolate that average out for the remainder of the year.

If you’re not on track to max out, figure out how much you need to contribute to make up that difference. And if you are on track to max out, what are you going to do with that extra cash flow once you hit the max?

An option, if you don’t earn more than the income limit, is to save that money in a Roth IRA. Where you pay tax on the money up front, but not when you take it out down the road.  

Required Minimum Distributions (RMDs)

Required Minimum Distributions were not required in 2020 under the CARES and SECURE Acts enacted due to the COVID-19 pandemic. Some of these changes stuck around for 2021 and beyond. It’s important to keep these changes in mind throughout the rest of the year. You do not want to miss taking your RMD, as it can be extremely costly.

The required age of RMDs increased from 70 ½ to 72 in 2020 and will continue to be the new age RMDs start. If you will be turning 72 in 2021, and this is your first RMD, then you will have until April 1, 2022, to make your minimum withdrawal instead of the standard date of December 31 of each year.

Tax-Loss Harvesting

Tax-loss harvesting refers to the practice of taking capital losses (you sell securities worth less than what you first paid for them) to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can be an approach to manage your tax liability.

Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to, potentially, offset capital gains next year. But remember, tax rules are constantly changing, and there is no guarantee that the treatment of capital gains and losses will remain the same in the coming years.

By taking losses this year and carrying over the excess losses into the next, you can potentially offset some (or maybe all) of your capital gains next year. Before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio.

After big moves in the market, like we’ve seen off the pandemic lows, there might be capital gains in your investment accounts. It’s good to keep this in mind when making investing decisions for the future. While its important, it shouldn’t be the only basis for deciding whether or not to sell a position in your account.

If you’re looking into this strategy, familiarize yourself with the IRS’s “wash-sale rule.” This rule indicates that investors can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale.

With these strategies in mind, there are things you may be able to do now to address both your current tax obligation and those you may be required to address further down the road.

We know that 2020 tax season is winding down for most folks and it might be nice to take a break before the 2021 season is upon us. But good tax planning, and therefore financial planning, is an ongoing process!

When we work with individuals and families, we always keep their tax situation in mind. Often working hand in hand with their tax preparers.

**While we are happy to discuss these tax ideas and ramifications, we are not tax preparers. Please consult with your tax professional before making any final decisions.**

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