The tax code saw some major overhauls in 2021 amid the pandemic. With many families and businesses struggling to stay afloat, lawmakers put in place a dizzying array of changes, including tax breaks, to provide extra help.
Some of those tax breaks, however, may not return in 2022, which means that taxpayers should be aware of what to claim and when, before time runs out. In some cases, that means taking steps before December 31 — which means the clock is ticking.
The tax code was the primary method tapped by lawmakers to deliver financial aid to families via stimulus checks and the enhanced Child Tax Credit. Both provided advanced payments on tax credits for the 2021 calendar year. That means some families could have a chance to claim additional money in early 2022 when they file their tax return — but, in some cases, only if they take steps now.
All the stimulus efforts had income thresholds. Families earning above those cutoffs received either reduced payments or none at all. But because the IRS based eligibility for those payments on families’ 2020 tax returns, some taxpayers could have a chance to claim extra money based on their 2021 filing.
For instance, take two parents with a child whose joint income in 2020 was $165,000. In that case, they wouldn’t have qualified for the third stimulus checks because their 2020 income was above the $160,000 threshold to qualify.
But if they expect to have earned a similar amount in 2021, they could cut their reported 2021 income through contributions to tax-deferred accounts like 401(k)s or health savings accounts. Such contributions reduce filers’ adjusted gross income (AGI). If their AGI falls below $160,000, they could potentially qualify for some or all of the stimulus payments of $1,400 per person when they file their taxes in early 2022.
In other words, their total benefit could be as much as a combined $4,200 for the two parents and their child, which they would receive in their tax refund early next year.
This year’s changes to the tax code add complexity for taxpayers, and it’s important to be prepared, tax experts said. Below are recommendations for tax moves before the end of 2021.
Stimulus checks and the Child Tax Credit
Taking advantage of income-reducing strategies like contributing to a 401(k) before year-end can pay off at tax time — by reducing your taxable income, you’ll have a smaller tax bill from Uncle Sam.
But it’s a strategy that can also help get more money from the stimulus check and enhanced Child Tax Credit programs. Even so, it is probably only most helpful to households that earned slightly above the income thresholds for these payments, given that these taxpayers are the most likely to be able to use the strategy to lower their adjusted gross income below the income cutoffs for the programs.
The income cutoffs for the third stimulus check are:
- $160,000 for joint filers
- $80,000 for single taxpayers
- $120,000 for head of household
For the enhanced Child Tax Credit, the income cutoffs for receiving the full credit – $3,600 for children under age 6 and $3,000 for those between 6 to 17 — are the following:
- $170,000 for joint filers
- $95,000 for single taxpayers
- $133,000 for head of household.
That means that if your income for 2021 is slightly above those cutoffs, you maybe able to reduce your adjusted gross income, which reflects your income minus certain deductions such as retirement contributions, to qualify for extra stimulus or CTC money in your 2021 tax refund.
But some retirement vehicles have deadlines that are coming up fast — like 401(k)s. If you want to put an extra contribution into that type of account for 2021, you must do it by December 31.
IRAs give tax-savvy investors a little more leeway, allowing people to contribute for the 2021 tax year until the tax-filing deadline on April 18, 2022.
An extra $300 to $600 in charitable deductions
Another benefit that expires after 2021 is a special charitable tax benefit that is only available through December 31.
This tax benefit was created to spur charitable donations after the 2017 Tax Cuts and Jobs Act doubled the standard deduction — making it impossible for most people to itemize their taxes. Most households don’t have enough deductions, such as mortgage interest payments and the like, to exceed the higher standard deduction. If they take the standard deduction, they don’t get an extra tax benefit from donating to charity.
Charitable organizations say they have seen donations decline in recent years and point to the 2017 tax law’s bigger standard deduction as one reason.
To counter this during the pandemic, lawmakers enacted a new tax provision that allows people who use the standard deduction to still donate to charity and take a deduction. In 2020, that stood at $300, but in 2021, the charitable tax benefit was changed to $300 for single taxpayers and $600 for joint filers.
“Most people use the standard deduction; they may not realize they can use this special rule,” Sunita Lough, IRS commissioner of the tax exempt and government entities division, said on a conference call with reporters earlier this month.
But, Lough said, there’s only a short time left to make a charitable contribution, given that it must be made by December 31.
“It’s not a huge amount, but it’s something that a large number of people can benefit from,” said Eric Bronnenkant, head of tax at the financial site Betterment.
“Backdoor” Roth IRA conversion
With this tax strategy, some tax experts advise that making a conversion before the end of 2021 could be a good strategy.
A Roth IRA allows people to put after-tax dollars into one of the accounts, and then to withdraw the funds tax-free when they retire. While the Roth IRA is useful for people who expect to be in a higher tax bracket as they get older, it has income limits that preclude upper-income households from using the strategy.
Except there is a loophole — the “backdoor” conversion.
In this case, people with traditional IRAs who earn above the income cutoffs for Roth IRAs — about $200,000 for married couples — can convert some of those traditional IRA funds into a Roth IRA, even if they earn above the income threshold for contributing to a Roth account.
But lawmakers have put the strategy in their crosshairs — given that upper-income households are tapping this middle-class strategy —and are proposing to eliminate it after 2021.
“I think people are getting the impression that the life of the backdoor IRA may be coming to an end at some point in the future,” Bronnenkant said. “Taking advantage of that for one last time in 2021 may be your last year to do so.”
The gift of the “gift tax”
People can give gifts of up to $15,000 per person — and married couples can give up to $30,000 per person — in 2021 without having to pay tax on that gift, noted Charity Falls, head of wealth planning at Union Bank.
“You can lose that if you don’t use it,” Falls noted. “This is a really good thing to do if they can afford it.”
To be sure, this is a strategy for higher-income families that may want to pass on wealth to children or grandchildren without paying gift taxes. In 2022, the limit will increase to $16,000 per gift, she added.
Additionally, the gift of tuition is tax-free and doesn’t count toward the $15,000 gift limit, when payments are made directly to the school, she added. A grandparent, for instance, could pay for part of a grandchild’s tuition by paying the school directly. The payment is tax-free and there’s no limit on the contribution amount.
Had a capital gain? Take a loss
Say you made some money in GameStop this year, and sold the stock at a profit. The IRS will ask you to pay capital gains tax on that profit when you file your taxes in early 2022 — but there’s a way you could reduce that tax.
It’s a strategy called tax-loss harvesting that works by offsetting a gain by also claiming a loss. (This only applies to stocks or investments held in taxable accounts, not pre-tax retirement plans.) But to take the loss and claim it on your 2021 tax return, you must sell the investment at a loss before December 31.
One thing to watch out for is the IRS’ 30-day wash-sale rule, which disallows this strategy if you sell at a loss and then buy a similar investment within 30 days, noted Bronnenkant. For instance, selling an S&P 500 fund at a loss and then buying another S&P 500 fund within that 30-day period would violate that rule.
“It’s to prevent people from selling at a loss and buying it back immediately,” Bronnenkant noted.