3 Year-End Tax Strategies for 2021 to Keep Your Financial Plan on Track

Posted by Adam Robert - September 9, 2021

title graphic - 3 year-end tax strategies for 2021 to keep your financial plan on track

The year 2021 is fast coming to an end, but there is still time to make smart moves to maximize your savings and minimize your tax bill next spring. While your situation at this point in time will vary from your neighbor’s or colleagues', here are three year-end tax strategies that can help you no matter what your life stage or current situation.

Year-End Tax Strategy #1: Reduce Your Taxable Income

Strategy #1: Reduce Taxable Income

This basic approach is the place to start. There are many options, but here are a few examples to consider.

  • Timing mutual fund sales or purchases
  • Review your RMD implications
  • Consider a qualified charitable distribution
  • Contribute the maximum to retirement accounts
  • Defer your income

Timing mutual fund sales and purchases

  • If you are selling a mutual fund as part of your portfolio rebalancing, perhaps you want to do so before it distributes capital gains for the year (usually in the last few months of the calendar year).
  • You should be careful about buying mutual funds for a taxable account this time of year. November and December are active times for capital gains distributions, and you could end up paying taxes on a profit you didn't see. To avoid paying additional taxes, consult with your financial advisor or broker before purchasing to find out when distributions will be made. In addition to traditional mutual funds, you may want to consider purchasing ETFs because they make fewer distributions, making them more tax efficient.

If you’re retired… review your RMD implications

  • If you’re age 72 or older, review and process your RMD for 2021, if not already done. Required Minimum Distributions (RMDs) were waived in 2020 but are required again this year. (There is a 50% penalty if you don’t take your RMD!)

Consider a qualified charitable distribution

  • Consider a QCD. Retirees age 70½ and older may want to consider a qualified charitable distribution, a direct payment to 501(c)3 charities from pre-tax IRAs, which doesn’t count as taxable income.

If you’re still working… contribute the maximum to retirement accounts

  • to maximize your pre-tax savings.
    • The 2021 retirement contribution limits are:
      • $19,500 for contributions to 401ks, 403bs, 457s, as well as Thrift Savings Plans. If you are age 50 or older, you can take an additional $6,500 catch-up contribution.
      • $6,000 for traditional and Roth IRAs. If you are age 50 or older, your catch-up contribution is $1,000, so you can save up to $7,000 with tax advantages.
      • (Note that the door closes on Dec. 31 for 401(k) contributions, but you have until April 15th of next year to max out your IRA contributions.)

Defer expected income

  • You may want to delay some of your income, such as a bonus, out until next year depending on your employer’s stability and your future work options.

Year-End Tax Strategy #2: Maximize Your Deductions

The standard deduction for married couples filing jointly for tax year 2021 is $25,100, for single taxpayers and for married individuals filing separately, the standard deduction is $12,550, while for heads of households, the standard deduction is $18,800 for tax year 2021. Though most people will use the standard deduction, you also want to consider other options, including “above the line deductions” that can be taken in addition to the standard deduction:

  • Make HSA contributions
  • Contribute to a 529 plan
  • Harvest your capital losses.
  • Pick up capital gains if you're in a low tax bracket.
  • Harvest losses on cryptocurrency.
  • Bundle deductions into certain years.
  • Donate cash to a charity.

Make HSA Contributions

HSA contributions can be taken in addition to the standard deduction, and you can make tax-deductible contributions to health savings accounts up to April 15th of next year. Taxpayers with a qualified high-deductible family health insurance plan can deduct up to $7,200 in contributions to a health savings account in 2021. Individuals with self-only coverage can deduct $3,600. Those age 55 or older are eligible for an additional $1,000 catch-up contribution.

Contribute to a 529 Plan

Families with children can use 529 plans to prepare for college expenses and save on their state income taxes next spring. Most states offer a state income tax deduction for contributions made by residents by December 31st to a state-sponsored plan. However, a handful of states may allow a deduction for contributions to any 529 plan or allow tax-deductible contributions up until April 15th of next year. While there is no federal tax deduction for 529 contributions, money in these plans grow tax-free and can be withdrawn tax-free when used for qualified education expenses.

Harvest Your Capital Losses

If you own stocks that have lost money, you can sell them and deduct up to $3,000 on your federal taxes. That money can offset gains on other stocks or be applied to regular income taxes.

Just be careful not to violate the wash-sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after the sale.

Pick Up Capital Gains if You're in a Relatively Low Tax Bracket

The end of the year is also a good time for some people to sell stocks that have appreciated significantly in value. This can be a particularly good move for those anticipating being in the 10% and 12% tax brackets since their capital gains tax may be zero. The stocks can then be repurchased after 30 days, which resets the basis and minimizes the amount of tax to be paid on future gains.

Even if you're not in the lowest tax brackets, you may want to sell winning stocks to reset the basis if you're also harvesting losses. Another reason to sell investments at this time of year is to rebalance your portfolio.

Consider Bundling Medical and Charitable Deductions into Certain Years

Because the threshold for deductions on medical expenses and charitable donations is higher now, you may want to consider bundling those expenses into specific years and only claiming them every two or three years.

For example:

Max Out Medical Expenses: By grouping as many non-emergency medical expenses as possible in a single year, you can maximize the deduction you get for those expenses. In 2021 you can only deduct expenses that exceed 7.5% of your adjusted gross income.

If you’ve already had some significant healthcare expenses for the year, see if you can move medical expenses that you’d normally take next year to the end of this one. For example, if you have a dentist appointment in January, move it to mid-December instead.

Long Term Care Insurance: If you recently purchased long-term care insurance, you may be able to deduct the premiums. The older you are, the more you can deduct. In 2021, the deductions range from:

  • $450 for someone 40 years or less
  • $850 for people older than 40 and younger than 50
  • $1,690 for those 50-60
  • $4,520 for those between 60 and 70
  • $5,640 for someone over 70

Charitable Donations: Instead of making annual charitable gifts, give two, three, or even five years' worth of donations in a single year, then take a few years off.

Focusing all of your donations in a single year increases the value of deductions beyond the threshold for a single year, and then you can take the larger standard deduction in the “skip” years.

A donor-advised fund may be an option if you are bundling charitable expenses. A donor-advised fund, or DAF, is a giving account established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.

Donate Cash to a Charity

Deducting charitable donations has traditionally been a popular way to reduce tax liability, but not everyone can do so. Normally, you have to itemize to deduct any charitable contributions. That can be a challenge with the 2021 standard deduction set at $12,550 for single taxpayers and $25,100 for married couples filing jointly.

However, the CARES Act included a provision to allow taxpayers to write off up to $300 in charitable contributions on their 2020 return even if they couldn’t itemize. In 2021 that deduction is back and has been increased to $300 per person so a married couple, filing jointly, is eligible for up to a $600 deduction. To claim a deduction, your gift must be a cash donation.

Year-End Tax Strategy #3: Think Long Term

Strategy #3: Think Long Term

  • Convert money from a traditional 401k or IRA retirement account to a Roth 401k or Roth IRA.
  • Take strategic early distributions in retirement
  • Business Owners: Look at the big picture

Convert Money from a Traditional Retirement Plan to a Roth Plan

Withdrawals from traditional 401ks and IRAs[1] are taxed after retirement, but distributions from Roth plans are tax-free. Plus, Roth IRA accounts don't have required minimum distributions, which can also be beneficial for those looking to reduce taxes in retirement.

Fortunately, the government allows you to convert money from traditional accounts to Roth accounts to get these benefits. When money is converted from a traditional to a Roth account, taxes must be paid on the converted amount.

With some concerned about rising tax rates, it may be best not to delay making any planned conversions. If you're going to do a Roth conversion, this may be the year to do it.

Take strategic early distributions in retirement

After age 59-1/2, you can pull distributions from your retirement account before your RMD is required. This strategy gives you control over the amount and timing of distributions based on your expected tax bracket for any given year. This may be helpful if you have large retirement accounts, so you can reduce the size of annual RMDs and future total taxable income. The aim is that these withdrawals will be taxed at a lower income tax rate compared to your future rate. Discuss with your advisor.

Business owners

Tax planning needs to be more than a once-per-year exercise for business owners when filing your taxes. Yes, you may be able to delay filing your 2021 taxes until late 2022 with extensions. But many tax planning moves that can help lower your total taxes may need to be made before the end of the current year — and now is the time to review your business structure and long-term goals.

Whether you are you a sole proprietor, S-Corp, LLC, Partnership or C-Corp, the best structure for your business may change as your business and income grow. Every few years you want to review this question with your CERTIFIED FINANCIAL PLANNER™ and CPA and even more often if your business is growing rapidly.

Meet with Your Tax Advisor (and Financial Advisor)

Whatever your situation and strategies, now is a good time to meet with a tax advisor. They have finished their October tax filings and may have time in their schedule before the busy tax season starts after the first of the year.

An advisor can help you pinpoint which end-of-tax-year strategies to reduce taxable income or maximize deductions. If you don't regularly use a tax professional, many people run their numbers through tax software, which can be beneficial.

If you haven’t met with your financial advisor or CERTIFIED FINANCIAL PLANNER™ yet this year, now is an excellent time to connect on progress toward your long-term goals. Coordinating with your team of financial professionals is a smart idea to make sure recommended strategies work well together. As the old saying goes, "Don't step over dollars to pick up dimes.”


Understanding Long-Term vs. Short-Term Capital Gains, Investopedia

Bitcoin Taxes in 2021: A Guide to Tax Rules for Cryptocurrency, NerdWallet

Questions and Answers for the Additional Medicare Tax, IRS

Donor-Advised Funds, Investopedia

Are You Making Business Financial Decisions by Default?, Clute Wealth Management

Small Business Owners: How to Chart Your Course to a Spectacular Retirement

[1] A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.


Adam W. Robert, CFP® of Clute Wealth Management in South Burlington, VT and Plattsburgh, NY, an independent firm that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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