Beginning of the Year Tax Moves to Make

Author: Scot Macfarland, CFP® CEP EA MPAS, Financial Planning Consulting Manager, Wealth Management

The 2021 tax season is quickly approaching. Most clients will need to file tax returns by April 18, rather than April 15, due to the Emancipation Day holiday in Washington DC. While we are already in 2022, there are still some things you can do to help clients save on their 2021 return while also setting themselves up for potential tax savings in the future.

The following are some areas to discuss with clients prior to the tax filing date:

IRA Contributions

Saving money in an IRA account can be a powerful way for clients to meet retirement goals. The 2021 IRA contribution deadline is April 15, 2022. For 2021, contribution limits are $6,000 if your client is under age 50 and $7,000 for those 50 and over. Clients contributing to a pre-tax IRA can reduce taxable income. Clients can also make a post-tax Roth IRA contribution and have a potentially tax-free gain on any growth in the account if they meet the income requirements and follow the distribution rules.

Modify Qualified Plan Contributions

While IRAs are great savings vehicles, a client’s 401(k) plan can be an even more powerful vehicle for retirement savings. This is because 401(k) plans have significantly higher contribution limits. For 2021, the 401(k)-contribution limit is $19,500. Individuals aged 50 and older may also contribute an additional $6,500 which is the catch-up contribution limit. The amounts are the same for both Traditional and Roth 401(k) plans, and limits are per individual. Encourage clients to increase their payroll percentage each year to take advantage of the pre-tax contribution benefits, while also building up their retirement nest egg.

Consider Exercising ISOs Early in the Year

If your client has vested, unexercised Incentive Stock Options (ISOs) in a publicly traded company that they are planning to exercise this year, they may want to consider exercising them earlier in 2022. Under the regular tax calculation, exercising ISOs is not a taxable event but the spread between the exercise price and Fair Market Value at exercise is added to the calculation for the client’s Alternative Minimum Tax (AMT). Individuals need to own the ISOs for at least two years and exercise and hold ISOs for one year before selling for the spread to be taxed as long-term capital gains instead of ordinary income. However, if the AMT is a concern for certain clients, they may choose to exercise and sell their ISOs prior to the time requirements listed above. This is called a disqualifying disposition and the ISOs would be taxed at ordinary income rates. If this is done prior to the end of the year, it generally removes any AMT concern from the original ISO exercise.

Look at a Roth IRA Conversion

A Roth IRA conversion can be a useful tool for individuals looking to reduce taxable income to avoid moving into higher tax brackets, allowing them to save a considerable amount of money over the long term. Some advantages of a conversion include: 1) Contributions and earnings grow tax free; 2) Clients can withdraw contributions at any time, for any reason, tax free; and 3) There is not a requirement for minimum distributions so if you don’t need the money, you can keep it intact to pass on to heirs. Clients with higher incomes can also benefit by creating what’s called a “backdoor Roth IRA.” Basically, it allows higher income clients to sidestep the Roth’s income limits by converting funds from a traditional IRA to a Roth IRA. Some things to consider before completing a conversion are that you must pay taxes on the conversion when it is done and you must wait for five years to take penalty-free withdrawals, even if you are already age 59 ½.

Evaluate Your Paycheck Tax Withholding

Advise your clients to review their tax withholding, especially if they have had major employment or life changes, such as an increase to their income, a change in marital status, arrival of a new child or purchase of a home. If they are not withholding enough taxes, they may owe money when filing income taxes and face an unexpected bill. Or if they withhold too much and receive a larger return, they may prefer to adjust their taxes, so they receive more money in each paycheck. The IRS also has a tax withholding estimator available to help clients determine if they are withholding the right amount from their pay.

Modify Estimated Payments Based on Last Year’s Taxes

Similar to reviewing paycheck tax withholding, your clients who make estimated tax payments (if they are self-employed or for income earned on the side in addition to their regular salary) may also want to review and modify their payments if they either withheld too little or too much in 2021. Again, this ensures that they don’t get caught off guard with a large tax bill or overpay and limit cash available to them throughout the year.

Consider Selling for Long-Term Capital Gains Treatment in Current Environment

Given that stock values are generally up and tax rates are relatively low, certain clients may want to consider selling stocks to take advantage of the long-term capital gains treatment. Investments held for longer than a year and sold for a profit are taxed at a lower rate. If clients experience any investment loss, they may take advantage of it by offsetting and decreasing the tax on any investment gains.

Talk to Clients with Irrevocable Trusts about Distribution of Income Plans

If you have clients with Irrevocable Trusts, you should talk to them about their plans for earnings in the trust. If they plan to distribute the earnings rather than keeping them in the trust, you can begin working with them now to create an investment plan to minimize taxes. You should consult with a tax advisor to avoid a potentially higher trust and estates tax bracket and learn how these changes may impact your client.

As you consider options with your clients, make sure you have engaged a qualified tax advisor to ensure the client qualifies for certain tax advantages based on their income and individual situation.

For more information about minimizing taxes for clients while maximizing opportunities for growth, please feel free to contact me at

To learn more about Momentum Independent Network, contact Wealth Management at or 833-4HILLTOP.

The paper/commentary was prepared by Momentum Independent Network (MIN).

Momentum Independent Network Inc. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. MIN and HilltopSecurities are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, TX 75201 (214) 859-1800, 833-4HILLTOP. Member FINRA/SIPC

For Professional use only.

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