Tax Law Change on the Horizon: Here is How You Should Adjust Your Year-End Tax Planning

Credello: The holidays are upon us, and that means another year is winding down. Along with festive celebrations, this time of year is also critical for tax planning. With tax law changes on the horizon for 2021, here’s what you need to know to get ahead of potential changes and adjust your year-end tax planning.
How to Prepare for Year-End Tax Planning
The most critical element of year-end tax planning is that you do it. Having a plan in place can help you get ahead of potential changes so you’ll be set whether or not certain laws go into effect. There are a few critical things everyone can do to prepare for tax planning, including:
1. Pay off any existing tax debt.
It’s critical to wipe the slate clean and pay off tax debt before attempting to manage the new tax law changes. If you haven’t already done so, work with the IRS on a payment plan or submit an offer in compromise if your financial situation allows it. Unfortunately, tax debt isn’t going away any time soon. So it’s best to get a payment plan in place today so you can look ahead to future taxes.
2. Decrease taxable income by maximizing deductions.
There are things you can do each year to decrease taxable income. For example, be sure to make maximum contributions toward tax-advantaged retirement vehicles like an employer-sponsored 401(k) or individual IRA. You’ll also want to look at health savings accounts (HSAs) as another way to reduce what you owe now and receive tax-advantaged growth on that money in the future.
It’s also wise to think about managing deductions from two perspectives: the tax law as it stands and with potential changes. For example, suppose you’ve had a high tax year. In that case, you may look at additional ways to decrease taxable income, like making hefty charitable contributions. But if you believe you’ll be in a higher tax bracket next year due to changes in the tax law or new job circumstances, you may defer that sizeable charitable contribution to reap the most benefit from it next tax year instead.
3. Think about gifting more.
High net-worth individuals tend to rely on gifts as a form of wealth transfer. However, since current legislation is targeting the federal gift and estate tax exemption, it may benefit wealthy individuals to think about giving more now. The current exemption in 2021 is $11.7 million per person. But the amount you can give during your lifetime free of gift tax could be dramatically reduced as early as Jan. 1, 2022.
4. Work with a tax professional.
While some tax changes are set in stone, others are still up in the air. If you’re uncertain about if and how your taxes may be impacted, it’s smart to link up with a tax professional. They can guide you through scenarios that could occur with tax planning and make sure you’re making the most of any changes.
Source: Credello