Tax Year-End Planning
As we approach the end of the year, there may be opportunities for you to improve your tax situation. Effective tax planning can help reduce income taxes for current and future years. The outline below highlights some of these tax saving opportunities. Please note that these items apply for federal tax purposes and the state tax treatment could differ. If you would like to discuss any of these opportunities please reach out to your local team of CPA’s and accounting professionals, we are ready to assist!
Donate to Charity
You can deduct cash donations to certain qualified charitable organizations even if you take the standard deduction. For 2021, the amount you can deduct in addition to your standard deduction is $600 per tax return for married filing jointly and $300 for all others.
Contribute the Max to Retirement Accounts
Try to increase your 401(k) contributions so that you are putting in the maximum amount allowed ($19,500 for 2021, $26,000 if you are age 50 or over). Or, at least contribute the amount that will be matched by your employer. Pre-tax contributions reduce your taxable wages.
Also consider contributing to an IRA. You have until April 18, 2022, to make your IRA contribution for 2021. Making a deductible IRA contribution will reduce your taxable income for the year. You can contribute a maximum of $6,000 for 2021, plus an additional $1,000 if you are 50 or over.
Check IRA Distributions
Minimum distribution requirements were suspended for 2020 but are required for 2021. You must start taking regular minimum distributions from your traditional IRA by April 1 following the year you reach age 72 (70 ½ if you reached 70 ½ prior to January 1, 2020). Failing to take out the required minimum distribution will trigger penalties.
When you are under the thresholds above, you find your deduction by applying the 20 percent to the lesser of your defined qualified business income, or taxable income less certain other items.
Example: If you have defined QBI of $100,000 and taxable income of $120,000 with no capital gains, your Section 199A deduction is $20,000 (20 percent of $100,000).
Offset Capital Gains
Short-term capital gains are taxed at ordinary income tax rates. Consider examining your portfolio for stocks that you could sell that would produce a tax loss to offset your capital gains. Long-term gains are offset first by losses and then short-term gains. If your capital losses exceed your capital gains, you are allowed a capital loss deduction up to $3,000 and can carry over the excess losses to future years.
Withholding and Estimated Taxes
If you expect a large increase in income before the end of the year or have been receiving unemployment benefits without withholding, please let us know so we can determine if the appropriate amount of tax has been paid for the year. Depending on the type of income, you could also be subject to the Net Investment Income Tax. Penalties for underpayment of tax could be assessed for taxpayers who do not pay enough tax throughout the year, either through withholding or estimated tax payments.
Business | Considerations
100% Business Meals Expense Deduction
A temporary exception to the business deduction for food and beverages has been increased to 100% for amounts paid to restaurants from January 1, 2021 through December 31, 2022. This temporary 100% deduction is designed to help restaurants during the pandemic. The 50% limitation for business meals still applies to food and beverages purchased from other establishments such as a grocery store or convenience store.
Health Insurance for >2% S-Corp Shareholders
If you are a >2% owner of an S corporation and the business has paid for your health insurance or reimbursed you, make sure the cost is included on your W-2. If the health insurance is not included on your W-2, the IRS position is that health insurance will be treated as an itemized deduction subject to a 7.5% of AGI limitation. These payments are not subject to payroll taxes.
Purchase Business Assets
With bonus depreciation at 100 percent and increased limits for Section 179 expensing, you can expense the entire cost of most assets you buy and place in service before December 31, 2021. Qualifying bonus depreciation and Section 179 purchases include new and used personal property such as machinery, equipment, computers, and furniture.
Business Retirement Plans
One of the best ways for small businesses to reduce their taxes is to set up a retirement plan. Businesses may be able to lower their taxable income by funding qualified retirement savings plans. Additionally, tax credits may be available for certain businesses.
Home Office Deduction
Due to the Pandemic, we understand that more small business owners have begun working from home. You may be eligible for the home office deduction which can help reduce your taxes for housing expenses that you are already incurring. You must regularly use part of your home exclusively for conducting business and your home should be your principal place of business.
Don’t Assume You Are Taking Too Many Deductions
If your allowable business deductions exceed your business income, you have a tax loss for the year. With a few modifications to the loss, tax law calls this a “net operating loss,” or NOL. If you are just starting your business, you could very possibly have an NOL. You could have a loss year even with an ongoing, successful business. You can carry 2021 NOLs forward to future years, creating a benefit to your business in the form of future tax liability savings.
What does all this mean? You should never stop documenting your deductions, and you should always claim all your rightful deductions.
Review How Your Business is Set Up
As your business and income grows, the best form of tax structure for your business may change. We can help you review your tax structure and evaluate the short-term and long-term considerations to help you determine if converting the tax structure of your business makes sense.
COVID-19 | Additional Considerations
Economic Impact Payments
A third round of economic stimulus payments were sent to qualifying individuals in 2021. The maximum amount provided was $1,400 for individuals ($2,800 for married taxpayers filing jointly) and an additional $1,400 for each dependent. These payments are subject to phase out thresholds and if an eligible taxpayer did not receive a payment, it can be claimed as a recovery rebate credit on your 2021 tax return.
Second Draw PPP Loans
If you received a second draw PPP loan, make sure to apply for forgiveness once all loan proceeds for which you are requesting forgiveness have been used. If you do not apply for forgiveness within 10 months after the last day of the covered period, the PPP loan payments are no longer deferred, and you will need to begin making loan payments to your PPP lender.
Child Tax Credit
The child tax credit has increased for 2021 to $3,000 per qualifying child and $3,600 per qualifying child younger than 6 years old. It also makes 17-year-olds eligible as qualifying children, and the credit is fully refundable for most taxpayers. If you have been receiving advanced payments of the child tax credit and the amount of your credit exceeds the amount you received as an advance, you can claim the remaining amount of credit on your 2021 tax return. If the amount of your advanced payments exceeds the amount you are allowed to properly claim, you may need to repay the excess payment.
Child and Dependent Care Credit
The child and dependent care credit have been enhanced for 2021. The credit percentage has increased to 50% of eligible expenses for 2021 and the maximum amount of qualifying expenses has increased to $8,000 ($16,000 for two or more qualifying individuals). Thus, the maximum amount of the credit available rises from $1,050 ($2,100 for two of more qualifying individuals) to $4,000 (or $8,000). This credit is also refundable for 2021.
Student loan debt that is forgiven from 2021 through 2025 is not included in gross income. Tax relief applies to federal and private student loans.
Employee Retention Credit
This credit has been extended through the end of 2021, subject to potential upcoming legislative changes, and allows eligible employers to claim a credit for paying qualified wages to employees. For 2021, the credit against applicable employment taxes for each quarter is equal to 70% of qualified wages paid to each employee not to exceed $10,000 of wages per employee. The maximum ERC available is $7,000 per employee. Generally, to be eligible your business must have been fully or partially suspended during the calendar quarter due to governmental authority limiting commerce due to COVID-19, or your gross receipts for a calendar quarter are less than 80% of the gross receipts for the same quarter in 2019.
Summary | Final Thoughts
We know that some of the above considerations can be confusing and may be difficult to navigate. If we can be of further assistance, please do not hesitate to call us at 808.529.9990. Our experienced team of Certified Public Accountants (CPA) and Tax Professionals can help you and your business take advantage of all available opportunities!
The HiAccounting Team
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