Federal Employees Should Act Now to Avoid Missing 2021 Tax Savings Opportunities

While there is uncertainty with respect to future tax law changes, there is certainty as to available tax saving opportunities for 2021. With less than a month to go before the end of 2021, there are some tax moves that many federal employees should consider performing in order to fully benefit and reduce their 2021 federal tax liability.

Most of these tax savings opportunities are only temporary and will not be around starting Jan. 1, 2022. This column reviews these tax savings opportunities.

Some tax saving opportunities were enacted by Congress during 2021 for eligible individuals. The following example illustrates:

Jeff and Leora are a married couple with two children, ages 8 and 5. Jeff is age 40 and is a federal employee who, as of Dec. 1, 2021, has contributed $15,000 to his traditional Thrift Savings Plan (TSP) account. Leora is age 36 and works in private industry who, as of Dec. 1, 2021, has contributed $15,000 to her traditional 401(k) retirement plan. Jeff and Leora estimate that their 2021 adjusted gross income (AGI) will be $162,000 which is below their 2019 AGI of $180,000 and 2020 AGI of $175,000. This is because Leora temporarily left the workforce earlier in 2021. Jeff and Leora did not qualify for the $5,600 in third round stimulus payment earlier in 2021 because both their 2019 and 2020 AGI’s were above the $160,000 AGI limit for third round stimulus payments to married filing jointly individuals.

However, if Jeff and Leora perform some income reducing moves before Dec. 31,2021 that result in their 2021 AGI being reduced below $150,000, they could be eligible for the $5,600 in stimulus payments and additional child tax credits amounting to $1,600 for one child and $1,000 for the other child.

To reduce their anticipated 2021 AGI from $162,000 to below $150,000, Jeff and Leora should consider making the following income-reducing moves during December 2021:

1. Both Jeff and Leora will each contribute an additional $4,500 to their traditional TSP and traditional 401(k) plans, respectively. They have each contributed year-to-date $15,000. By contributing another $4,500 up to the maximum $19,500 for 2021, they will reduce their AGI by a total of $9,000, from $162,000 AGI to $153,000 AGI.

2. Included in Jeff and Leora’s $162,000 AGI are capital gain distributions from their open-ended fund totaling $3,000. They also own 100 stock shares of a company that has declared bankruptcy. They bought the shares originally for $5,000. Since the company has declared bankruptcy, the 100 shares have a $0 value as of Dec. 31, 2021, and Jeff and Leora will be able to declare a $5,000 long term capital loss on their 2021 federal income tax return when they file in the spring. In so doing, the $5,000 will offset the $3,000 capital gain distribution dollar for dollar. Also, the remaining $2,000 net capital loss will offset Jeff and Leora’s other ordinary income. The total decrease of $5,000 of Jeff and Leora’s AGI will further reduce their AGI to $148,000.

The overall result of (1) and (2) is that Jeff and Leora’s 2021 AGI will be reduced from $162,000 to $148,000. When they file their 2021 federal income tax return in the spring of 2022, Jeff and Leora will be eligible to receive the full $5,600 (third round stimulus payment) and additional child tax credits of $1,600 and $1,000. Their 2021 federal income tax liability will therefore be reduced $5,600 plus $1,600 plus $1,000, or a total of $8,200.

The following are some tax saving opportunities that employees should be aware of for 2021:

Compare Investment Options

Third stimulus payment.

The third stimulus payment was enacted by Congress in March 2021 and was the most generous; namely, $1,400 for each member of a household.

The payment “phases out” according to an individual’s tax filing status and AGI, beginning at $150,000 and ending at $160,000 of AGI for married individuals filing jointly. The AGI “phaseout” range is $75,000 to $80,000 for single tax filers and $112,500 to $120,000 for head of household tax filers.

Many individuals received their third stimulus payment in March and April 2021, based on their 2019 or 2021 AGI. However, some individuals did not receive their third stimulus payment as a result of excess 2019 or 2020 AGI (like Jeff and Leora in the example above). Some individuals may have received a partial stimulus payment. In either case, these individuals may be eligible for some, or all of the third-round stimulus payment based on their reduced 2021 AGI compared to their 2019 or 2020 AGI amounts.

Charitable giving.

For 2021, individuals who do not itemize on their federal income tax returns (reporting charitable deductions on Schedule A) can deduct a cash/check charitable donation of $600 (married filing joint) and $300 (single or head of household). But unlike 2020 in which a $300 charitable donation was an “adjustment to income” (thus reducing one’s AGI), the 2021 donation is a “below the line” deduction (thus reducing taxable income). A married couple in a 22 percent federal marginal tax bracket and making cash/check charitable contributions totaling $600 during 2021 will therefore save 22 percent of $600 or $132 in federal income taxes.

As is true with individuals who itemize and who make cash/check charitable donations, a donor making the $300/$600 cash/check donation must have an official notice or letter from the charitable organization (before filing their 2021 tax return) that records the donation amount and whether the donor received in return for the donation anything of value.

Also, for those individuals who itemize on their federal income tax returns and who make cash/check donations, there is a charitable contribution limit of 100 percent of income during 2021.

Child tax credit for 2021.

Unless Congress extends the law, for the year 2021 only there is an enhanced child tax credit of up to $3,600 per child under age 6 as of Dec. 31, 2021, and a $3,000 per child tax credit between the ages of 6 and 17 as of Dec. 31, 2021. These credits are in addition to the existing child tax credit of $2,000 per child. The $2,000 per child tax credit applies to child dependents under age 18 as of Dec. 31, 2021 – versus under age 17 in previous years.

The two child credits have different AGI phaseouts. For the 2021 credits, recipients lose $50 of the 2021 additional tax credit per $1,000 of AGI, starting at $150,000 of AGI for married filing joint filers, $75,000 of AGI for single filers, and $112,500 for head of household tax filers. For the existing $2,000 per child tax credit, the AGI phaseout begins at $400,000 of AGI for married filing joint filers and $200,000 of AGI for single and head of household filers.

Refund and balance due issues with child tax credits.

When Congress expanded the child tax credit payment in March 2021, it instructed the IRS to make monthly advance payments to eligible individuals of up to 50 percent of their total credit based on 2019 or 2020 AGI. During the period July through December 2021, eligible individuals are receiving half of their allowable $3,600 or $3,000 in six equal monthly payments.

The result is that these advanced payments will either decrease expected 2021 federal income tax refunds or increase any balance due payments when 2021 federal income tax returns are filed in spring 2022. Those employees receiving monthly child tax credit payments should be aware of this. They may have to either immediately increase their federal income tax withholding early in December or consider making a federal estimated tax payment (for the fourth quarter of 2021) that is due January 18,2022 in order to avoid an under withholding penalty when they file their 2021 federal income tax returns in spring 2022.

The purpose is to avoid paying a significant balance due and under withholding penalty when they file their 20. Affected individuals are encouraged to speak to a tax professional before year-end concerning any potential problems with the advanced child tax credit payments.