How to maximize year-end tax planning after a layoff or early retirement

Clients grappling with a layoff or jumping into retirement may have some tax-planning opportunities as the year winds down, top advisors say.

By the third quarter of 2020, 28.6 million baby boomers reported being out of the workforce, out of an entire cohort numbering 71.8 million, according to Pew Research. That’s 3.2 million more exits than during the same period in 2019.

Whether someone leaves the workforce for good or plans to return for the right opportunity, their income and tax bracket may be significantly lower in 2022 compared with 2021, affecting year-end decisions.

“When managing someone’s money, it’s very, very important to understand their tax situation,” said Dale Brown, chairman of the board at Salem Investment Counselors in Winston-Salem, North Carolina, which ranked second on CNBC’s 2021 FA 100 list.

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Someone leaving the workforce through retirement or a layoff in 2021 may seek ways to push 2021 income into 2022.

For example, if someone between jobs needs to tap appreciated portfolio assets to cover living expenses, they may wait until January 2022 to sell investments, bumping capital gains into the lower-income year, Brown suggests. 

And if a married couple’s taxable income is $83,350 or less for 2022, they may pay 0% long-term capital gains on those profits, he said. 

“Whether you’re retiring or laid off, it’s almost universally true that you want to defer income from a higher-tax year into a lower-tax year,” said Brown.

Other moves may be waiting until 2022 for retirement plan withdrawals, delaying year-end bonuses or postponing business income until January.  

If someone itemizes tax deductions, they may also explore ways to accelerate write-offs into 2021, Brown said, with charitable gifts typically offering the most flexibility. 

For example, married investors may give multiple years of donations in 2021, a tactic known as “bunching,” to exceed the $25,100 standard deduction. The move covers multiple years of charitable gifts with a tax break for 2021.

Donor-advised funds, a popular way to bunch gifts, allow someone to make a large up-front contribution while giving from the account over multiple years.   

“You really get the best of both worlds,” said Steven Check, president of Check Capital Management in Costa Mesa, California, which ranked No. 4 on the FA 100 list. 

“You get the deduction in a higher-income year and take your time to give the money to where you’d like, even spreading it out over a few years,” he said.

While accelerating deductions or deferring income may reduce taxes for certain filers, the plan may backfire if someone rejoins the workforce and earns more than expected in 2022, triggering an even higher tax bill, among other consequences. 

For example, a higher adjusted gross income may boost Medicare Part B and Part D premiums two years later. 

“You have to sit down and look at the numbers,” Brown added. “That’s the only way of doing it.”