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Year-End Tax Planning Playbook

Year-End Tax Planning Playbook

December 01, 2021

The end of the year is often one of the busiest times for our advisors both professionally and personally. Additionally in 2021, we continue to monitor pending legislation that could have a major impact on our clients. The Build Back Better Act[1] has already passed in the House and pending vote in the Senate. While there could be additional changes before passage, there are things to take action on now while you still have time to do so.

Consider the Pros and Cons of a Roth IRA Conversion

As we discussed in a recent blog, converting pre-tax IRA dollars to a Roth IRA may be a way to reduce your tax liability over time. This can be particularly attractive if you anticipate your tax rate will be higher in the future, but also to reduce or eliminate future Required Minimum Distributions from your IRA. From an estate planning perspective, this also reduces the tax implications of inheriting IRAs for your heirs due to the new 10 Year Rule which requires most non-spouse beneficiaries of IRAs to deplete the account within 10 years and thus pay the income taxes due. More on this can be found in our blog on the SECURE Act.

If you have ever contributed to a non-deductible IRA, the time may be running out to convert your contributions to a Roth IRA tax-free. The Build Back Better Act looks to close the perceived loophole that allows higher income families to get funds into Roth IRAs with little to no income tax due. Additionally, the ability to make after-tax 401(k) contributions and immediately converting to Roth IRAs appears to be going away after this year.

While there is no income limit to convert IRAs to Roth since it was repealed in 2010, the Build Back Better Act would look to reinstate an income limit again starting in 2032. If you have a larger IRA, it may be a good time to strongly consider converting your IRA to a Roth IRA in installments before the income limitation takes effect.

Take Required Minimum Distributions

If you turn 72 before year end, it is important to begin taking your annual Required Minimum Distributions (RMD) from IRAs and other qualified retirement accounts like 401(k)s and 403(b)s. While you technically don’t have to start until April 1st of the year after you turn 72, this will result in needing to take two taxable distributions in the same year which may not be advisable.

Under the IRA Aggregation Rule, you are permitted to combine the values of multiple IRAs for the purposes of calculating your RMD and satisfying the total distribution from any account(s) of your choosing. Aggregation does not apply if you have both an IRA and employer sponsored plan subject to RMDs.

Unless your spouse is the sole beneficiary of your IRA and they are more than 10 years younger than you, you will calculate your RMD by taking the previous year end balance of your IRA or Qualified Plan and dividing by the correct RMD factor corresponding with your age. See table below.[2] It is important to note the table will be updated for 2022[3].

There is an exemption for those who work past 72 and still have an employer sponsored plan unless they are more than a 5% owner in the company. If you plan to work past age 72 this can be a good reason NOT to rollover your employer plan to an IRA.

If you fail to take the full required minimum distribution amount the IRS will penalize you 50% of the amount you failed to withdraw from the IRA or qualified account. Keep in mind that this is only the minimum amount you must withdraw to satisfy IRS requirements. If you are already withdrawing or want to withdraw a larger percentage of your IRA it is permissible.


Giving can have many benefits both to the recipient and the giver. You may consider gifting some highly appreciated investments as a way of diversifying your portfolio. This can help you avoid capital gains taxes on the growth while also helping a person or cause you care about.

If you are charitably inclined and have most of your assets in your IRA, you may want to see if a Qualified Charitable Distribution makes sense for you. This is available for IRA owners over age 70.5 and generally comes into play for those taking Required Minimum Distributions. The distribution must be less than $100,000 and be made directly to the charity(ies) to avoid taxation on the distribution. As many retirees an unable to itemize their deductions, this can prove beneficial.

Lump Deductions into the Current Tax Year

If you have the ability to pre-fund charitable contributions, pre-pay property taxes or can deduct medical procedures or expenses from the current tax year it can help you lift your itemized deductions to exceed the 2021 limit of $25,100. If you fall into this category, alternating between itemizing your taxes and taking the standard deduction every other year may help you reap benefits.

Avoid Phantom Income and Consider Harvesting Investment Losses

Because many mutual funds pay out their capital gains at the end of the year to all shareholders, this can cause those who have only owned these investments for a short-period of time to realize what we call “phantom income”.

Example: ABC Flagship Mutual Fund will be paying 10% of its value in short-term capital gains distributions on December 16th or the payout date. Its current price is $10.00/share on the record date December 14th.

Lieutenant Dan invests $100,000 in profits from Bubba Gump Shrimp Company into 10,000 shares of ABC Flagship Mutual Fund on the record date December 14th.

Assuming no change in market value for the fund on December 16th Lieutenant Dan will recognize a capital gain of $10,000 taxable at his ordinary income rate. This could result in Dan paying potentially thousands of dollars in unexpected taxes.

One should consider other mutual funds or similar exchanged traded funds that have no or minimal capital gains or wait to purchase the investment until after the record date.

As was discussed in Fine-Tune Your Taxes for 2020 and Beyond, within a taxable investment account there may be opportunities to sell some underperforming investments at a loss and use the losses to offset gains you realize on other investments. This can allow you to re-balance in a more tax-efficient manner. You can carry forward an unlimited amount of investment losses to offset gains in future years, while you can only offset ordinary taxable income up to $3,000 in a future tax year. These will carry forward until exhausted.

Meet with Your Tax Professional or Business Advisor Prior to Year-End

I personally work with a tax professional and business advisor to provide me with proactive advice on the structure of my business as it grows and consider it a great investment. There are proposals within the new tax legislation that could impact the taxation of pass-through entities such as S-Corps and LLCs and it might be good to revisit your business structure with a tax professional well-versed in businesses like yours. Asking open-ended questions such as, “What would you suggest for me if you were in my shoes?“ rather than trying to pick their brain about specific strategies you might have heard of seems to work best. Ultimately any conversation you have should consider tax ramifications, but also your long-term goals for the business.

As you can see, the clock is ticking to execute on any tax planning for this year. With the holiday season already here, your financial institution may impose additional deadlines prior to year end as well which is why it is helpful to start the conversation sooner rather than later so that we can collaborate with your current tax professional or introduce you to one. We are always happy to field your questions.

[1] House Passes Economic Package With Tax Law Changes by Michael Townsend.
[2] Uniform RMD Table
[3] New Uniform Life Tables for calculating RMDs take effect January 1, 2022 (


Visionary Horizons, LLC nor any of its representatives provide tax preparation or advice. Please consult with a tax professional prior to implementing any strategy. Registered Investment Advisory Services are custodied at Schwab Institutional, a division of Charles Schwab & Co., Inc. (“Schwab”) Member SIPC., TD Ameritrade Institutional, a division of TD Ameritrade, Inc. (“TD Ameritrade”) Member SIPC.

Securities offered through Purshe Kaplan Sterling Investments, member FINRA/SIPC, Headquartered at 80 State Street Albany, NY 12207. Purshe Kaplan Sterling Investments and Visionary Horizons, LLC are not affiliated companies.