Follow this guide to ensure that you are optimizing your tax benefits.

 

Who doesn’t like to be prepared? The adage, “The early bird gets the worm” rings true in all aspects of life – taxes included. We have compiled a few tips on how to be prepared for the upcoming tax season in this end of year tax planning guide.

 

That being said, this past year has seen the passage of several significant tax laws – among them the (SECURE Act) Setting Every Community Up for Retirement Enhancement Act, the (CARES Act) Coronavirus Aid, Relief and Economic Security Act. The SECURE Act modified several tax rules associated with retirement contributions and distributions supporting an individual retirement account (IRA) or 401(k), while the CARES Act employed many taxes and other financial provisions to infuse cash into a struggling economy to support both businesses and individuals in response to COVID-19.

 

As we close the end of the year, there is still time to position yourself to leverage the opportunities provided under the new tax structure, including identification and execution, before the end of the year to decrease your 2021 tax liability. This Tax Planning Guide is intended to highlight notable tax provisions and possible planning opportunities to contemplate for 2022 and, in some cases, 2023, both with tempered discretion and balance today.

 

In this 2021 Year-End Tax Planning Guide brought to you by Adeptus, we walk you through the steps needed to assess your personal and business tax situation in light of the new laws and identify actions needed before year-end to reduce your 2021 tax liability.

 

Act before December 31st to enhance your tax breaks

Whether you are having a great year, bouncing back from fresh losses, or yet grappling to get off the ground, you may be able to save on your taxes if you make the right strategic moves before the year’s end.

 

Defer your income

Income is taxed in the year it is collected—but why pay tax now if you can pay it at a later time?

It’s difficult for employees to delay wage and salary income, but you may be able to defer a year-end bonus for example, into next year—as long as it is conventional practice in your company to pay year-end bonuses the subsequent year.

If you are a freelancer, self-employed, or do consulting work, you have more freedom. For example, deferring billings until late December can ensure you that you won’t collect payment until the following year.

 

Whether or not you’re employed or self-employed, you can also defer income by exercising capital gains in 2022 rather than in 2021. It simply makes sense to defer income if you think you will be in a similar or a lower tax bracket the following year. You don’t want to be faced with a bigger tax bill next year if supplementary income could push you into a higher tax bracket. If that’s plausible, you might want to advance your income into 2021 so you can pay tax on it in a lower bracket earlier, preferably than in a higher bracket later.

 

Take last-minute tax deductions

Just as you may desire to delay revenue into next year, you may want to decrease your tax bill by expediting deductions this year.For example, donating to charity is a great way to get a deduction – and you regulate the timing.

 

For individuals, in 2021 you can deduct up to $300 per tax return of conditional cash contributions if you take the conventional deduction. For 2021, this number increases to $600 per tax return for those filing jointly, filing married, and $300 for other filing situations.

 

• You can boost the tax benefits of your philanthropy by donating appreciated stock or assets rather than cash.
• Better yet, as long as you’ve owned the asset for over a year, you get dual tax benefits from the contribution: You may deduct the assets’ market rate on the date of the contribution and you evade spending capital gains tax on the built-up appreciation.

 

You must have a receipt to back up any donation, notwithstanding the expense. Other expenses you can expedite include:

• An evaluated state income tax bill due January 15th
• A property tax bill that is due early the year after. 
• A physician or hospital bill.

 

Bear in mind, ramping up deductions could backfire if you’re subjected to the alternative minimum tax, discussed below.

Don’t miss out on precious tax deductions if you can itemize versus claiming the standard deduction. Per the IRS, approximately 75% of taxpayers exercise the standard deduction but could be missing out on important tax deductions if they can itemize.

 

• If your qualifying expenses surpass the conventional deduction, which in 2021 is $24,800 if you are single, or $12,400 if you’re married filing jointly then you likely should maximize your deductions and itemize.
• Don’t agonize about deciding if you can itemize or if you should take the standard deduction. Adeptus will determine it for you based on your answers to easy questions regarding your deductible obligations.

 

If you’re on the fence of whether to itemize or not, your year-end approach should center on bunching. This is the application of timing expenses to provide lean and bloated years. In one year, you pack in as many feasible deductible expenses, applying the tactics described above. The purpose is to exceed the standard deduction sum and declare a bigger write-off.

In revolving years, you limit deductible expenses to hold them beneath the standard deduction expense because you get credit for the full standard deduction despite how much you really spend. In the thin years, year end preparation emphasizes driving as many deductible expenses as feasible into the subsequent year when they’ll hold added value.

 

Watch out for the Alternative Minimum Tax

Seldomly, expediting tax deductions can cost you money, and nobody wants that. Initially intended to ensure that wealthy people could not practice legal deductions to run down their tax bill, the AMT is now frequently affecting the middle. The AMT is calculated distinctly from your usual tax liability and with complex rules. You have to spend whichever tax bill is more expensive. This is a year-end subject because some expenses that are deductible under the conventionalized rules—and consequently candidates for expedited payments—are not deductible supporting the AMT.

 

For example, State and local income taxes and property taxes are not deductible under the AMT. Therefore, if you anticipate being subject to the AMT, don’t make payments that are scheduled in January 2022 in December 2021.

 

Sell losing investments to offset gains

An essential year-end approach is termed “loss harvesting”—selling investments such as stocks and mutual funds to recognize losses. You can use those losses to balance any taxable profits you have earned during the year. Losses balance gains dollar-for-dollar.  There is some nuance here, so speak with your CPA or tax advisory first.

 

Also, if your losses surpass your gains, you can apply up to $3,000 of excess loss to offset other revenue.  If you have more than $3,000 in excess loss, it can be transferred over to the following year. You can use it then to negate any 2021 earnings, plus up to $3,000 of additional income. You can transfer over losses year-after-year forever.

 

Add the maximum to retirement accounts

There is not a better investment than tax-deferred retirement accounts. They can increase to an ample sum because they compound over time tax-free.

 

Company-sponsored 401(k) plans may be the most beneficial structure because employers frequently match participation. Try to boost your 401(k) contribution so that you are placing in the greatest amount of money allowed ($19,500 for 2021, $26,000 age 50 or over). If you can’t manage that much, try to provide at least the number that will be equaled by employer participation.

 

Also, contemplate contributing to an IRA.

 

• You normally have until the filing deadline to make IRA contributions, but the earlier you get your money into the account, the earlier it holds the potential to begin to grow tax-deferred.
• Making deductible additions further decreases your taxable income for the year.
• You can contribute a maximum of $6,000 to an IRA for 2021, plus an additional $1,000 if you are 50 years of age or older. 

 

If you are self-employed, a great retirement plan might be a Keogh plan. These plans must be set by December 31st but contributions may still be performed until the tax filing deadline (including extensions) for your 2021 return. The sum you can contribute depends on the type of Keogh plan you prefer.

 

Sidestep the Kiddie Tax

Congress formed the “kiddie tax” rules to deter families from moving the tax bill on investment income of Mom and Dad’s high tax bracket to junior’s low bracket.

 

• For 2021, the kiddie tax taxes a child’s investment income above $2,200 at identical rates as the parents.
• If the child is a full-time student who contributes less than half of his/her support, the tax normally applies until the year the child turns age 24.

 

So, be cautious if you intend to give a child stock to sell to fund college expenses. If the accrual is too high and the child’s unearned income surpasses $2,200, you could end up paying taxes concurrently.

 

Check IRA arrangements

You must begin making routine minimum arrangements from your conventional IRA by April 1st following the year you reach age 72. Nevertheless, minimum allocation requirements have been discontinued for 2021. Neglecting to take out sufficient funds triggers one of the common draconian IRS ‘punishments’:

 

• A 50% excise tax on the cost you should have withdrawn based on your age, your life expectancy, and the quantity in the account at the opening of the year.
• After that, yearly withdrawals need to be made by December 31st to evade the penalty.

 

When you make withdrawals, contemplate inquiring your IRA custodian to keep the tax from the installment. Withholding is optional, and you set the cost, but opting for withholding allows you to avoid the trouble of doing quarterly approximated tax payments.

 

Be mindful of your flexible spending accounts

Flexible spending accounts, also termed Flex Plans, are fringe benefits that numerous companies grant that let employees direct a portion of their pay into a particular account which can then be drawn to satisfy child care or medical bills The benefit is that money that goes into the account bypasses both income and Social Security taxes. The curve is the notorious “use it or lose it” rule. You must determine at the opening of the year how much to provide to the plan and, if you don’t use it all by the end of the year, you relinquish the overflow.

 

With year-end quickly approaching, check to see if your employer has chosen a grace period authorized by the IRS, enabling employees to spend 2021 money set aside as late as March 15th, 2022. If not, do what employees have perpetually done and make a last minute trip to the pharmacy, doctor, or optometrist to use up all of the funds in your account. The Consolidated Appropriations Act (CAA) was signed into law on December 27th, 2020 as a stimulus proposition to administer relief to those afflicted by the pandemic. The CAA enables employers to lengthen healthcare FSA and dependent care FSA grace periods for up to 12 months into the subsequent plan year for plan years ending in 2021 and 2022.

 

We hope this guide has helped shed light on the various considerations that need to be made with respect to tax strategies.  Your professional team at Adeptus is here to help make your financial journey easier.