5 Tax-Smart Planning Ideas for 2021


After a chaotic 2020 and a year ripe with unpredictability, 2021 offers new hope as we move beyond the pandemic and return to life as we once knew it.

In the wake of a shift in government power, new tax changes have been proposed for high income earners that may result in higher rates. While the proposed bill has not passed yet, it\’s important to be aware of how these changes will potentially effect you.

Get prepared with these five tax-smart planning ideas:

1. Convert to a Roth IRA

Tax rates are expected to increase. Convert a traditional IRA to a Roth IRA now and take advantage of current rates. This will also help you avoid higher tax rates in the future. You can also mitigate the conversion tax liability with charitable contributions and other tax attributes.

2. Accelerate income tax deductions

The Biden campaign tax plan proposes all itemized deductions be limited to 28%. Lump future contributions together and accelerate deductions into 2021 before limits are imposed. You can also consider a donor-advised fund, such as the SEI Giving Fund, where you open and contribute now to get the deduction, then decide later on which charities receive donations.

3. Lower cost-basis strategies

The Biden campaign proposed taxing capital gains as ordinary income. When all is said and done, high-income tax states could see the tax rate on capital gains over $1 million exceeding 50%. Harvest gains now by selling highly appreciated assets to lock in the current rate. Or set up a charitable remainder trust to systemically digest gains and distribute income over time.

4. Accelerate income 

The potential for higher tax rates creates a \”sale\” environment. Be proactive and push tax-smart strategies forward, such as deferring business expenses, a Net Unrealized Appreciation (NUA) rollout, or Non-qualified stock options and non-qualified deferred compensation plans.

5. Leverage 401(k) contributions: To Roth or not

The proposed changes have also created uncertainty surrounding 401(k) tax advantages by reducing the tax advantages for high earners and increasing the advantages for middle and low earners. Leverage 401(k) contributions by contributing to a Roth 401(k).

All, some, or none of the proposed changes could be put into effect but the important thing to remember is that these changes should not create panic. A simple conversation with your financial advisor can settle any fears and create a financial strategy that can best suit your needs now and in the future.

Let experienced professionals, like Haven Financial Planning, help you. Contact us today at [email protected] or 716.458.1900 to get started!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.