With the 2021 tax season right around the corner, now is the time to act on your tax planning strategies. Don’t forget any last-minute contributions or purchases that will benefit either your personal or business return. Below are some of the items we’re reviewing with clients in our year-end tax strategy meetings.
1. Charitable contributions can offer maximum tax advantages for those itemizing deductions.
The Consolidated Appropriations Act extended the provision allowing for individuals to fully deduct cash charitable gifts, up to 100% of their AGI in 2021. If you had a significant influx of cash this year, it may be the right time to invest in a donor-advised fund. If you take the standard deduction, you have the opportunity to deduct up to $300 in charitable contributions ($600 if married filing jointly). A bonus for those over the age of 72: if you are considering giving to charity, make a contribution directly from your IRA, known as a Qualified Charitable Distribution, which reduces your taxable income and is considered to be a part of your RMD for the year.
2. Top off retirement plans, either through your workplace or IRA.
Contribution limits to IRAs are $6,000 per person, while employer 401(K)s are limited to $19,500 per year. If you’re not on track to maximize your allowable contributions to these plans, consider doing so. If you’re not sure just how much you should contribute now to meet your retirement goals in the future, we are here to help.
3. Maximize contributions to healthcare savings accounts (HSAs).
If you have a high-deductible insurance plan, an HSA can help cover unexpected and uncovered healthcare costs. HSAs are a great option for paying medical bills with pre-tax dollars, all while reducing your taxable income. Individuals can contribute up to $3,600, while those with family coverage can contribute up to $7,200 for the 2021 tax year. Any money invested in your HSA grows tax free; these accounts can be a valuable (and chronically underused) tax planning tool. FSAs also saw an increase in allowable contributions, of $10,500 (up from $5,000) with funds able to roll over to the next year.
4. Consider any upgrades, equipment, furniture, or other business expenses.
Reinvesting in your business can be a powerful way to reduce your overall tax liability. Large purchases, such as equipment and furniture, can be depreciated over the life of the item, while other business expenses (such as supplies, software, meals, etc.) can be deducted the year in which they were purchased. For a coprehensive guide to small business tax deductions, dowload our free guide here.
5. Apply for PPP loan forgiveness before your deadline to avoid paying interest.
Ensure you have all documentation needed to apply for forgiveness. Borrowers with PPP loans of $150,000 or less can use the SBA PPP Direct Forgiveness Portal.
6. Pay any estimated taxes you owe to avoid penalties.
Not only should estimated taxes be paid on time, but the appropriate amount should be calculated throughout the year. If you have seen a significant increase in income, which could bump you to a higher tax bracket, don’t forget to account for those changes when calculating estimated payments.
7. If you received advanced monthly payments of the Child Tax Credit, consider how these will affect your return.
The credit amount is based on your 2020 income. If you have higher income in 2021, make sure to report these changes to avoid having to repay the excess amount. You can do so through the IRS Child Tax Credit Update Portal and see a difference in your December credit advance.
8. 2021 has been another year for tax changes, which may affect both your business and personal taxes.
Consulting with your CPA can help to determine if you are eligible for tax deductions and credits that may expire in 2021.
9. If you’re thinking about going green, this is the year to do so.
There are a handful of tax credits for individuals incorporating renewable energy sources into their households. Things such as energy-saving improvements to your home, alternative fuel vehicle refueling property, or purchasing a fuel cell vehicle could mean an added deduction this tax year.
10. Business meals are fully deductible through 2022.
Take full advantage of this temporary increase (normally only 50% deductible) while supporting the restaurant industry.
It’s not too late to reduce your tax burden. Consider these above items, and reach out to our team with any questions or to schedule a year-end planning meeting. A tax projection completed at the end of the year can make a big difference in your overall strategy.
If your business is stuck in Excel, the new year might be a great time to make the transition into a digital, cloud-based back-office workspace. Having a clear, real-time picture of your business finances with automation tools makes it easy to keep your books up to date—exactly the information you need to make last-minute tax-saving moves.