You made it through the hectic December holidays. Congratulations.
But don't slow down now. You still have to accomplish a few final year-end tax tasks.
I know, not how you want to spend the last few days of the year. But these 6 year-end tax moves could save you some money, either when you file your 2021 return next year or down the tax road.
1. Don't miss the RMD deadline.
You're enjoying your well-deserved retirement thanks to all those years of savings. Don't mess things up now by missing your required minimum distribution (RMD). This withdrawal from tax-deferred retirement plans is demanded by Uncle Sam once you turn 72 (or 70 ½ if you hit that age before the law change).
The reason for RMDs is simple. The U.S. Treasury has waiting for its cut of your traditional IRA and 401(k) earnings for years. Once you get on the RMD track, you must take it annually by Dec. 31. Don't ignore the requirement or you'll face a hefty tax penalty.
2. Consider converting to a Roth IRA.
If you have a lot of money in a tax-deferred traditional IRA, now could be a good time to start shifting some of it to a Roth version. That way, you won't have to worry about future RMDs.
Of course, that means you'll have to pay tax on any traditional IRA amounts you convert to a Roth IRA. But at least by doing so now, you'll be paying at historically low ordinary tax rates. You'll be glad you did if, as many expect, tax rates go up in the future and you're not at the low rate in retirement you expected. Plus, those RMDs could bump you up into a higher tax rate.
Don't make the retirement plan decision lightly. Once you convert to a Roth IRA, it can't be undone. But if you do decide the switch is right for you, do so by Dec. 31, especially since Congress likely will take up limiting Roth conversions when it reconvenes next year.
3. Contribute to your child's 529 plan.
It's always a good idea to put money into tax-favored education plans. Lots of parents swear by 529 plans. These college savings accounts grow tax-free as long as you eventually use the money to pay for qualifying educational expenses. In addition to the usual classroom-related fees, books, supplies and equipment, tax law changes now make 529 funds available for kindergarten through grade 12 education costs.
Even better, some states offer income tax deductions to residents of the state that contribute to that state's plan. To make sure you get to claim that deduction for this tax year, you'll need to make your 529 plan contribution by the end the tax year.
4. Take advantage of noncash charitable donations.
If you still itemize, you know that charitable donations are one of the best ways to bulk up these write-offs. And gifts other that cash can mean more to count on Schedule A. These atypical donations include appreciated stock, household goods and clothing, and even an old auto. You can find more on these options and their tax implications and advantages in my Boxing Day post.
If you find one of these philanthropic possibilities is right for you and your favorite charity, get to donating! Just like cash (or check or credit card) donations, your gifts must be made by Dec. 31 to count on next year's return filing.
5. Harvest your tax losses.
In looking at your portfolio for possible assets to donate, you might have discovered some holdings that just aren't worth it anymore. They've lost money, so it's time to finally dump them. Those losses could offset any profit you recognized this year, lowering possible capital gains taxes. You need to sell those stocks — harvest them in the tax vernacular — by Dec. 31 for them to be of value to you this tax year.
6. Double check expected estimated taxes.
Santa packages under the tree are the only things that show up in December. Lots of folks get extra cash at the end of the year. The money definitely is welcome, but note that it's also taxable income. That means in most cases, you need to pay estimated tax on the funds.
These amounts that typically aren't subject to withholding come from some common sources. There are the added tips from customers feeling extra merry this month. Investors get dividend and capital gains distributions, some of which can be sizeable and which are taxable whether received as cash payouts or reinvested. And don't forget about that gig job you took this month to boost your holiday bank balance.
The December cash influx will count in your final 2021 quarterly estimated tax payment. Yes, that isn't due until Jan. 18, 2022. But now is a good time to think about where you're going to get that money. Maybe use some of those cash Christmas gifts?
Yeah, I know it's now how you planned to spend the holiday money, but if you underpay your 1040-ES amounts, you'll owe penalties and interest at regular Form 1040 filing time.