2021 Year-End Tax Planning Strategies:

How to Prudently Reduce Taxable Income at the End of the Year

As one year winds down and we prepare for a new one, here are some simple tips to help lower your taxes and put you on solid financial footing as we look forward to 2022.

Give to charity. The charitable deduction is a powerful way to lower an income tax bill. With this deduction, every dollar of value that goes to charity is one less dollar in taxable income.  Of course, gifts to charity do not have to be made as cash.  Consider giving appreciated securities, like stocks, bonds, and shares in mutual funds.  Giving such appreciated assets has a double tax advantage of taking advantage of the charitable deduction and avoiding the realization of the taxable gains built into the assets. 

To take advantage of the charitable deduction, a taxpayer must itemize his or her deductions.  Typically, taxpayers who use the standard deduction cannot deduct their charitable contributions.  However, in 2021 there is a special deduction for gifts of cash to charity of up to $300 for individuals and up to $600 for married couples filing jointly.  It is not necessary to itemize deductions to take advantage of this $300 or $600 extra charitable deduction.  All that is necessary is to give cash (whether by check, debit card, or credit card) to an acting charity (not a donor advised fund or private foundation).  With this simple act, everyone can lower their tax bill at least a little.

Fund a 529 Education Savings Account. The 529 Education Savings Account, or just the 529 Plan, is an excellent way to save for higher education.  Parents or grandparents can easily set up a 529 Plan for one beneficiary and then add or change beneficiaries as the family’s education needs evolve. Contributions to a 529 Plan grow tax free and distributions for qualified educational expenses come out tax free as well.  There is no federal income tax deduction for contributions made to the 529 Plan, but may states, including Missouri, offer moderate deductions to state income taxes for contributions.  In addition to saving for higher education, up to $10,000 per year can come out of a 529 Plan tax-free to pay for K – 12 education as well.

Enroll in college planning 101 and find out more about college savings accounts.

Fund a Health Savings Account. Health Savings Accounts (HSAs) are likely the most powerful savings instruments out there.  They offer triple tax savings as contributions into the account are tax deductible, assets in the account grow tax free, and distributions for qualified medical purposes come out tax free as well.  The only limitation to the HSA is that only individuals with high-deductible health insurance plans are eligible to own one.  For 2021, an individual can contribute $3,600 and up to $7,200 with family coverage.  Also, individuals age 55 or older can contribute an additional $1,000.  Once funded, the secret to making the most of an HSA is to pay your current medical costs out-of-pocket and keep the assets in the HSA invested for ongoing tax-free growth. The HSA assets can be taken out to reimburse healthcare expenses at any time or the money can stay in the account until the owner turns 65 and is covered by Medicare, at which point the HSA operates like an Individual Retirement Account (IRA), with no required minimum distributions.

Check Flexible Spending Account balances. Individuals who contribute to a healthcare flexible spending account at work should check their remaining balance for 2021.  Most flex accounts do not allow owners to carry more than $550 in balance into the New Year.   However, Congress loosened the rules surrounding flex accounts because of the pandemic.  Now some employees may be able to carry over the full remaining balance for 2021, depending on the employer’s plan.  Also, employees can elect to contribute up to $2,850 into a flex account for 2022. Contributions are pre-tax and distributions are tax free as long as they pay for out-of-pocket health care expenses, like deductibles, co-insurance, or healthcare needs from the pharmacy.

Harvest Tax Losses. Investors with losses in their portfolios can use those losses to offset taxable gains.  Investors need to simply sell their loss assets, realize the loss, and match the losses against gains from elsewhere in the portfolio.  Investors should pay attention to the types of gains and losses. Short-term capital losses offset short-term capital gains, and long-term losses offset long-term gains.  An investor can also deduct $3,000 of losses against non-capital income.

Allow First Bank Wealth Management’s time-tested approach to prudent investment management maximize your returns to help you achieve your long-term goals. Find out more about First Bank’s investment management services*.

To find strategic ways to apply tax-deferred strategies to help minimize your tax burden, reach out to a knowledgeable advisor from First Bank Wealth Management.


By: David Frederick
                            David Frederick, J.D., LL.M. is the Senior Vice President and Director of Client Success and Advice at First Bank Wealth Management and Adjunct Professor of Economics at Washington University. David may be reached by phone at 314-995-8764Phone Call Icon or via email at [email protected].