top of page
Search

Tax Planning Strategies for 2021

Updated: Jan 12, 2021

With the close of this year fast approaching, we suggest the following tax planning strategies that may help you as you look to plan for 2021. Our goal is to help clients with these strategies to achieve tax-savings. Please don’t hesitate to reach out to us to see if one of these strategies may benefit you.


  1. Maximize tax-favored savings vehicles

  2. Consider Qualified Charitable Distributions

  3. Consider a Roth IRA Conversion




1. Maximize Tax-Favored Savings Vehicles


If you are planning to save in one of the following tax-favored savings vehicles in 2021, please note that the IRS has released the maximum contribution amounts as found in the table below. The amount that you can contribute to IRAs as well as the amount that you can defer into SIMPLE IRAs and 401(k) plans will remain the same in 2021. The amounts that can be contributed to Health Savings Accounts will be increased next year by $50 for self-only coverage and $100 for family coverage.


For More Information, See Sources:

- SIMPLE IRA Contribution Limits: see IRS Website

- 401k Contribution Limits: Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits on IRS Website

- HSA Contribution Limits: IRS Rev. Proc. 2020-32


You may be able to make additional contributions to a SIMPLE IRA or 401(k). Please contact us for more information on your situation. If you have questions about funding any of these tax-favored savings vehicles, please don't hesitate to reach out to us.



2. Consider Qualified Charitable Distributions


For those of you who are 72 or older with an IRA, who make charitable contributions, you may save money in taxes by making those charitable contributions as a qualified charitable distribution (QCD) from your IRA.


Example

If a married couple is 72 or older and plans to make charitable contributions of $10,000 in 2021, they could make those contributions in the following two ways:

  • Direct Contribution: Make a payment directly to their charity by writing a check. Assuming they have no other itemized deductions, the $10,000 of charitable contributions will not decrease their taxes since every married couple automatically receives a standard deduction of $25,100. Unless their itemized deductions are higher than that amount, the $10,000 of charitable contributions will not decrease their taxes. In addition, if this couple needed to take a required minimum distribution (RMD) in 2021 of $50,000, this amount would be taxed in their ordinary income rates.

  • Qualified Charitable Contribution (QCD): They could make a $10,000 charitable contribution from one of their IRAs. So $10,000 of their $50,000 RMD could be a QCD and only $40,000 of their RMD would be taxable. Assuming they didn't need to access any more of their IRA for living expenses, the benefit to them of this strategy is that they would save the tax that they would have normally paid on this $10,000 contribution. Assuming they were in the 22% tax bracket, their savings would be $2,200. If they were in a higher tax bracket, their tax-savings would be even more.

I have just used a $10,000 contribution as an example, but any charitable contribution, even small amounts, could qualify for this tax-savings. (Find more information see source IRA FAQs – Distributions (Withdrawals) on IRS Website). If you would like to consider it in your situation, please don't hesitate to contact us.



3. Consider a Roth IRA Conversion


If you are retired you may benefit from a Roth IRA conversion, especially if you have not started taking Social Security or distributions from your IRA.


Example

This can work well for dentists who retire and sell their practice prior to age 70. Assuming they live off their practice sale proceeds for several years, they may be in a very low tax bracket. However, if they have a large IRA or retirement plan balance, they may be required to take large required minimum distributions beginning at age 72. They may also take Social Security by no later than age 70. Both events will increase their taxable income and thus their taxes.


However, prior to this time, when they are in a lower tax bracket, if they convert some of their IRA to a Roth IRA, they will be required to pay tax on that conversion, but the timing is key. The tax on conversion could be at a lower rate than they would have to pay tax on in the future if they are in a higher tax-bracket. (Find more information on IRA FAQs - Rollovers and Roth Conversions on IRS Website)


Our goal is to help clients maximize tax planning strategies like these when appropriate, so if you would like to consider it in your situation, please don't hesitate to reach out.


Financial planning strategies in the new year with tax strategies like these may benefit you, based on your specific situation and financial goals. We would love to help you implement the strategies that will work best for you.

Comments

 

 

© 2020 Financial Freedom for Dentists, LLC

​

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Financial Freedom for Dentists LLC and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual advisor prior to implementation. Advisory services are offered through Financial Freedom for Dentists LLC, a SEC Investment Advisor.  Financial Freedom for Dentists LLC is not affiliated with or endorsed by the Social Security Administration or any government agency, and are not engaged in the practice of law. The presence of this web site shall in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Washington or where otherwise legally permitted. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Images and photographs are included for the sole purpose of visually enhancing the website. They should not be construed as an endorsement or testimonial from any of the persons in the photograph. The inclusion of any link is not an endorsement of any products or services by Financial Freedom for Dentists LLC. All links have been provided only as a convenience. These include links to web sites operated by other government agencies, nonprofit organizations and private businesses. When you use one of these links, you are no longer on this site and this Privacy Notice will not apply. When you link to another web site, you are subject to the privacy policy of that new site.  When you follow a link to one of these sites neither Financial Freedom for Dentists LLC, nor any agency, officer, or employee of the Financial Freedom for Dentists LLC warrants the accuracy, reliability or timeliness of any information published by these external sites, nor endorses any content, viewpoints, products, or services linked from these systems, and cannot be held liable for any losses caused by reliance on the accuracy, reliability or timeliness of their information. Portions of such information may be incorrect or not current. Any person or entity that relies on any information obtained from these systems does so at her or his own risk.

​

Advisory services are offered through Financial Freedom for Dentists LLC, a SEC Investment Advisor.  The Adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

bottom of page