Written by Prio Wealth’s Director of Financial Planning, Bill Dion, CFP®
and Prio Wealth Relationship Manager, Robert Devinney, CFP®
2021 saw an unprecedented level of tax policy legislation be proposed, debated, and voted on but when all was said and done, more provisions stayed the same than were changed, at least for now. Two of the more significant items in 2021 include changes to the child tax credit and continuation of economic stimulus payments.
Most notably, Congress ordered the IRS to prepay child tax credits monthly between July and December. Unfortunately, these payments have created confusion. Since they are a prepayment of an existing credit, many filers that typically enjoy receiving a refund each year will find those refunds smaller than usual. Further, many recipients of these prepayments won’t qualify for the credit so many will owe that money back, unless they proactively opted out of the payments last year.
Congress also approved a third round of stimulus checks in March of 2021, putting up to $1,400 in the hands of many taxpayers. As with the child tax credit, the payment was made based on information from the 2019 or 2020 tax returns and the IRS will be sending letters identifying the amount of the payment sent. More favorably than the handling of child tax credits though, any overpayments do not need to be returned.
Additional Tax Planning Tips:
1. The IRS remains backlogged from prior year returns so expect even longer delays this tax filing season and file early if you can.
2. If you are working remotely in another state, be sure to understand the state tax filing requirements for both states.
3. Unused Flexible Spending Account (FSA) and Dependent Care Flexible Spending Account (DCFSA) dollars can be rolled over for all of 2022.
4. The tax credit for child and dependent care costs is larger this year than it has been in the past. Some filers can receive a credit for child-care costs of up to $4,000 (one child) or $8,000 (two or more children).
5. For the charitably inclined, utilize Donor Advised Funds combined with a gift bunching strategy and if over age 70.5, consider using IRA’s to make Qualified Charitable Distributions (QCDs).
6. Extended for 2021, if you claim the Standard Deduction, you can claim an above-the-line charitable deduction for up to $300 (single) or $600 (joint) for cash charitable contributions. For itemizers, you can claim an even higher deduction for charitable contributions up to 100% of Adjusted Gross Income (AGI).
Planning consideration: Talk to your wealth advisor and/or tax professional before using the 100% of AGI charitable deduction. You may receive a better tax benefit by carrying forward contributions in excess of 60% of AGI into future years or by utilizing other charitable donation methods.
7. The new age for beginning Required Minimum Distributions (RMD’s) from tax deferred accounts is 72 and the life expectancy tables have been updated to reflect longer life expectancies.
Planning consideration: The Secure Act made drastic changes to how retirement accounts are treated when inherited. Talk to your wealth advisor about how these changes may impact your heirs and your legacy goals. Congress is still in the process of detailing the intricacies regarding many of the new regulations.
8. Maximize estate reduction strategies by fully utilizing the annual gift tax exclusions (increased to $16,000 in 2022) and by paying tuition expenses directly to schools to provide support in excess of the annual exclusion amounts.
9. Fund Health Savings Accounts (HSA’s), if your health plan is HSA eligible, to enjoy triple tax advantages (on contributions, growth, and withdrawals).
10. Keep an eye out for tax changes at the state level. Due to the federal stimulus efforts, most states are in a strong financial position and are seeking news ways reduce taxes for their residents.
It is important to note that all these strategies should be considered within the context of your priorities, overall financial plan, and your specific financial situation. If you would like more information on how these issues may apply to you specifically, please reach out to your Prio Wealth Advisor. Our goal is to guide our clients and help them navigate the financial issues that may impact them and their family. Please feel welcome to introduce us to like-minded friends and family members that may benefit from our services.
This document has been prepared by Prio Wealth LP (“Prio Wealth”) for informational and educational purposes only and not as investment, legal or tax advice. This document reflects the opinions of Prio Wealth and it is based on information that we believe to be reliable at the time of publication. However, Prio Wealth does not guarantee the accuracy and completeness of any sourced data. Opinions expressed herein are not intended to provide personal advice and do not take into account the unique investment objectives and financial situation of the reader. This document is not an offer to sell or a solicitation of an offer to buy any security and does not constitute a representation as to the suitability or appropriateness of any security or financial product. Prio Wealth cautions the reader that investments in securities involve risks and that past results are not indicative of any future performance.