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We’ll start with the ever-important disclaimer that this blog post is not intended to be tax advice, and you should consult with your tax professional regarding your particular situation before considering any of the tips discussed 🙂

Before we get into the tips, it’s important to note that the strategies discussed are based on the Biden Administrations’ initial proposals and are subject to change.

What do we know so far? It’s unlikely for the 2021 tax year that there will be tax laws affecting changes this year.


Three potential things that could happen in 2022:

  • Could tax rates go down? Highly unlikely.
  • Stay the same? Possibility, but low chance.
  • Will tax rates go up? Highly likely.


With that being said, here are FOUR tax planning tips for 2021:


1) Roth Conversions

Regardless of your current income tax bracket, it’s a great idea to plan for tax flexibility in retirement by having a “bucket” of tax-free money via Roth accounts (IRA, 401k). With income tax brackets on “sale” for 2021, it could make sense to fill up your marginal bracket by converting pre-tax money.

Especially for married couples who file jointly, the current compressed rates could be even more advantageous. If you’re considering Roth Conversion strategies, you’ll want to make sure you have the cash on hand to pay any tax liability comfortably.

You’ll want to consider accelerating charitable contributions (if you already plan on making them) to mitigate your tax bill. Any net operating losses from directly held businesses could be used to offset tax liabilities further.


2) Accelerating Deductions

The Biden Administration has discussed limiting the value of itemized deductions. Specifically for those in the top marginal bracket of 39.6%, limiting the maximum value of an itemized deduction to 28%. They’ve also discussed the possible return of the PEASE adjustment, which would create a phaseout on itemized deductions.

Tax deductions are essentially worth 10 cents + on any given dollar of deductions for those in the top marginal income bracket.

If you’re already planning on making charitable contributions for 2021 and beyond, the best strategy would be to accelerate contributions. You can even consider strategies such as a “donor-advised fund,”- which can allow you to get a current-year tax deduction and decide later which charities you’d like to support.

Additionally, you could gift appreciated securities (as long as they’ve been held for a year) to the donor-advised fund (instead of cash). This would increase your deductions and avoid a capital gain tax liability.


3) Accelerate Income

In a taxable investment account, you should consider harvesting gains in 2021, and defer harvesting losses into future tax years when the losses would be more valuable.

If you have employer stock in a 401(k) plan, you should consider recognizing net unrealized appreciation (NUA) income in 2021.

If you’re a business owner, you can accelerate income by pushing deductions into 2022. If you sold your business under an installment sale, you could modify the agreement, which triggers a “material change” and triggers capital gain in the year of modification. This would be a way to pay tax in this tax year for income received in future years.

If you have employee equity compensation such as non-qualified stock options, you could exercise them this tax year to accelerate the income tax liability. The same would go for incentive stock options if you plan on selling after exercising the option.

Lastly, for employee equity compensations such as restricted stock units (RSUs), you should consider an 83(b) election which allows you to take the compensation as ordinary income this tax year. It would also allow you to benefit from long-term capital gain treatment if the shares continue to appreciate.

An 83(b) election is a complicated strategy, and you’ll want to review the pros and cons of doing so with a professional.


4) Retirement Savings

The Biden Administration has proposed changes to 401(k) plans. The income tax deduction on traditional 401(k) contributions could be replaced with a flat 26% tax credit. Therefore, a taxpayer in the 39.6% marginal bracket would only see a 26% tax benefit.

This could argue for continuing to divert additional pre-tax (traditional) contributions to a Roth 401(k) in future tax years.

Keep in mind the current employee contributions allowed each tax year are $19,500 per individual (plus an additional $6,500 for those over age 50). Your employer’s match always goes in as a pre-tax (traditional) contribution.

Regardless of your tax bracket, considering Roth contributions is highly suggested.

One last speculation to note – the Biden Administration has suggested eliminating the step-up in basis of inherited assets. This is extremely unlikely to happen based on initial pushback from the public at large.


If you’re interested in working with a Certified Financial Planner to reduce taxes, invest smarter, and plan for financial independence, click here to start your free assessment.


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