9 Top Tax Tips & Reminders (2021) | Trust Point
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Tax Reminders and Pro Tips 2021 Edition

Updated April 12, 2021

Brian Koopman CFP®, CPA, Chief Operating Officer

The IRS has extended the federal income tax filing deadline to May 17, 2021 for most Americans.  Many states have also followed suit.  Here are some important reminders and five of our tax tips to keep in mind when preparing your 2020 tax returns. 

Tax Reminders:

  1. Quarterly Estimated Taxes:  Even though the deadline for filing has been extended, keep in mind that quarterly tax estimates must still be paid by April 15, 2021, otherwise you may incur penalties.
  2. Unemployment Tax: If you received unemployment in 2020 and your modified adjusted gross income is than $150,000, the first $10,200 of your unemployment benefit may be tax-exempt.  Given this tax law change took effect after some had already filed their return, the IRS has indicated they will be recalculating the tax due and refunding any overpayment without any additional action required.
  3. Stimulus Checks:  These are considered a tax credit, not income, so are not subject to income tax.
  4. Charitable Deductions:
    • For those using the standard deduction the above-the-line charitable deduction (to an IRS-approved charitable organization) for the 2020 tax year is $300 per tax return regardless of filing status. This was increased in 2021 to $600 for a married couple filing jointly. 
    • If you itemize deductions the adjusted gross income limit for cash contributions to an IRS-approved charity remains suspended for 2021, which means for contributions made in 2021, taxpayers can deduct up to 100% of their adjusted gross income (AGI).
    • The penalty for overstating a charitable deduction has been increased from 20% to 50% of the underpayment.  Keep a receipt for any charitable donation over $250.

Tax Tips 2020 Edition:

Tip No. 1: Satisfy Required Minimum Distributions (RMDs) using the IRA Charitable Rollover

The SECURE Act raised the beginning age for required minimum distributions (RMDs) to 72, from age 70½, previously. However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act waived Required Minimum Distributions (RMDs) for the 2020 tax year.

The SECURE Act did not adjust the age 70½ requirement for taxpayer eligibility to make a Qualified Charitable Distribution (QCD) up to $100,000 each year from an IRA to qualified 501(c)(3) charitable organizations (donor-advised funds, private foundations and supporting organizations are excluded). A qualified charitable distribution neither counts as an itemized deduction nor as taxable income, though it does count towards satisfying the RMD for that year.

This strategy may be beneficial for charitably inclined individuals who receive a greater tax benefit from the increased standard deduction rather than itemized deductions.

Tip No. 2: Understand Stimulus Check Eligibility

Stimulus payment eligibility is based upon the most recently filed tax return.  Taxpayers should review the rules for stimulus payments to see if their 2019 tax return and/or 2020 tax return make them eligible for payment. The full payment will be received for those with income below the limits and prorated up to the phase-out amount.

The limits are $75,000 gross income ($80,000 phase out) if single, $112,500 ($120,000 phase out) if filing as head of household or $ 150,000 ($160,000 phase out) if married filing jointly. If 2019 income is too high but 2020 income creates eligibility, get the 2020 return filed as quickly as possible.  Likewise, if the 2019 income creates eligibility but the 2020 does not, it may make sense to hold off filing until you have received stimulus payment.

If a return is not required for 2020, if is recommended to file anyway.  This acts as a confirmation with the IRS of which stimulus checks were received—or were not received.  If stimulus money is entitled, it lets the government know to send.

Tip No. 3 Roth Conversions

With income tax rates at historically favorable levels, individuals who believe their future tax rate might be higher than their current tax rate might consider converting a portion, or all, of existing Traditional IRA assets to a Roth IRA. Assuming the Traditional IRAs have no basis, the amount of the conversion is treated as taxable income. In exchange, the Roth IRA grows tax-free with qualified distributions also treated as tax-free.

This strategy can be beneficial for individuals with a taxable estate, as the tax cost for the conversion effectively reduces the size of the estate, while the named beneficiaries one day receive a very tax-favorable asset (compared to inheriting a Traditional IRA). In some cases, high net worth individuals might pair a Roth conversion with the accelerated charitable giving strategy (discussed below)1 as the charitable deduction reduces the effective tax cost of the conversion.

Individuals with notable assets, but with lower-than-normal income in 2020, might also consider this strategy, as it allows the taxpayer to essentially pay a reduced rate on the conversion while taxable income is low.

Tip No. 4: Accelerating Charitable Donations

Itemized deductions typically provide a tax benefit equal to a taxpayer’s marginal income tax bracket. A taxpayer in the 37 percent federal income tax bracket generally receives a 37 percent benefit for the total of itemized deductions.

Charitably inclined individuals should evaluate whether to accelerate charitable gifts. This consideration may also be particularly beneficial for taxpayers who experienced higher-than-normal income in 2021, as increased charitable giving shields a portion of income from otherwise being taxed at a higher rate.

Coordination with an experienced accountant is advisable, given certain adjusted gross income (AGI) limits that apply to charitable gifts. Should charitable gifts exceed the AGI limits, the excess becomes a charitable carryforward to be used within the next five years.  

While the Tax Cuts and Jobs Act increased the deduction for cash contributions to public charities to 60 percent of adjusted gross income (previously 50 percent AGI limit), the Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the deduction for contributions to public charities (other than donor-advised funds) to 100 percent of AGI for the 2020 tax year. This provision was extended to 2021 as a result of the omnibus spending bill signed in December.

Gifting Long-Term Appreciated Securities Rather than Cash
With equity markets near all-time highs, investors with taxable accounts may hold highly appreciated equity positions. From a tax planning standpoint, gifting long-term appreciated securities is an efficient charitable-giving strategy as the charity receives the same economic benefit as a cash donation, while the taxpayer receives a tax deduction for the full market value of the gift and avoids paying capital gains taxes on the gifted security.

Gifting Securities vs Cash Chart

Analysis assumes taxpayer subject to highest federal tax bracket (37%) and capital gains subject to 23.8% federal tax rate. Analysis assumes charitable gifts to qualified public charities.

Investors who have a portfolio overweight to equities may use charitable gifting as a means to rebalance back to target weights. In doing so, an investor is able to achieve philanthropic goals while avoiding having to sell appreciated equities to return to a desired target allocation.

Keep in mind that gifts of long-term appreciated securities to qualified public charities (including donor-advised funds) are limited to 30 percent of adjusted gross income (AGI) while similar gifts to a private foundation are limited to 20 percent of AGI. As noted earlier, charitable gifts in excess of the AGI limits result in a charitable carryforward that can be used over the next five years.

No. 5:  Evaluate When to Collect Social Security Retirement Benefits

Individuals nearing eligibility for Social Security retirement benefits should give proper consideration for when to start benefits. A recent study(1) estimated that only 4 percent of retirees start their Social Security benefits at the most optimal time, with retirees effectively forfeiting a collective $3.4 trillion in potential retirement income. A review of 2016’s new Social Security recipients(2) showed nearly 60 percent of individuals collected benefits before their full retirement age (FRA), with only 10 percent waiting beyond full retirement age. Nearly a third opted to begin receiving benefits at age 62, despite a significant benefit reduction.

While general guidance is to wait (if possible) until age 70 to collect a higher benefit, there are a number of important factors to consider:

  • anticipated life expectancy
  • income needs for the interim years when benefits would be delayed
  • availability of spousal benefits

For additional resources on this matter, please see our article titled “Solving the Social Security Puzzle.”

 (1)United Income, “The Retirement Solution Hiding in Plain Sight” (June 2019)
(2) “It’s Tempting to Take Social Security at 62. You Should Wait.” By Peter Finch. The New York Times. August 31, 2018.

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Brian Koopman CFP®, CPA, Chief Operating Officer