Tax strategies to review before year end

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Important topics you may want to discuss with your tax professional and financial advisor to avoid costly mistakes

James Mosrie, Senior Wealth Planner, Wells Fargo Wealth and Investment Management
James Mosrie, Senior Wealth Planner,
Wells Fargo Wealth and Investment

As we approach the end of the year, you may want to ask yourself whether you’re likely to pay more taxes than necessary for the 2021 tax year. Tax planning that worked for the 2020 tax year may not have the same outcome for the 2021 tax year. And there may be tax law changes on the horizon.

Tax conversations are easily put off, however, talking to your tax and financial advisors and your wealth planning professional now could potentially help you to avoid some costly mistakes.

A good place to start is a step-by-step approach that takes into account not only your 2021 liabilities but looks ahead to 2022. Potential tax legislation may affect your future income and capital gains taxes and talking to your advisors may help you prepare for any potential impact.

It is important to not wait until late in December to have these discussions with your advisors and to take action.

Here are three steps to consider before year end:

1. Review your income sources. These may include salary and bonus, retirement distributions, investment income, rental income, pensions and Social Security payments. Ask your financial advisor to run a capital gain and loss report. This report will provide you with a starting point as you discuss what actions to take with your tax advisor.

Your tax advisor may:

  • Confirm if you need to adjust estimated quarterly tax payments to help you avoid any penalties for under payment of your taxes.
  • Offer guidance on how to use charitable or capital loss carryforwards from prior years in the most efficient manner.
  • Suggest whether it makes sense to accelerate charitable giving by using strategies that may enable you to take a deduction in 2021 while spreading out the timing of your donations over multiple years via a Donor Advised Fund.
  • Advise you on making annual gifts to individuals either directly, to trusts, or to education accounts. Annual gift amounts up to $15,000 per recipient do not require filing of a gift tax return.
  • Discuss doing a Qualified Charitable Distribution from your Individual Retirement Account (IRA) if you are over 70 ½ directly to a qualifying charity to reduce the Required Minimum Distribution (RMD) amount that is taxable.

2. Talk to your financial advisor about your investment accounts:

  • Take RMDs from your IRAs and defined contribution plans. After being waived in 2020, they are required again in 2021.  Make sure you are including all retirement accounts to avoid penalties.
  • Review whether you should consider harvesting investment losses to offset capital gains.

3. Prepare for change. If you anticipate the much-discussed tax legislation to pass, work with your advisors to determine whether the following strategies might be appropriate:

  • Accelerating income into 2021 by taking greater distributions from retirement accounts.
  • Reviewing the timing of the sale or transition of a business if you are a business owner. A change in individual or corporate tax rates may have an impact on your business valuation.

It is important to not wait until late in December to have these discussions with your advisors and to take action. Transactions need to be completed by December 31st and can take time to process.  Waiting may put your best efforts at risk of not being completed in time.

Your advisors and tax professionals will help you determine your options and the steps to take before the year end to align with your financial goals.

Wells Fargo & Company and its affiliates do not provide legal or tax advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

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