As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation.
Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money.
If you expect this year's income to be near the threshold of a higher tax bracket, consider strategies for reducing your taxable income so that you can stay in the lower tax bracket. You can take steps to defer income and accelerate deductions to manage your taxable income accordingly. You may also shift income to another family member that falls in a lower tax bracket, ask us how. Click here for information on the 2021 tax brackets.
One strategy you could take to stay in a lower tax bracket is to contribute more to your retirement plans (401K, IRA, etc) and Health Savings Accounts at work or through independent financial institution. For tax year 2021, 401(k) contribution limits are $19,500, with an additional $6,500 for taxpayers who are age 50 and over. IRA contribution limits are $6,000 (with the catch-up contribution remaining at $1,000). Income limits may apply so check with us if you need clarification; we are happy to help.
If you happen to be in a lower tax bracket this year, consider converting some money from your traditional IRA to a ROTH IRA up to the top end of that tax bracket. You will pay taxes on the conversion (at your lower 2021 tax rate) but the money will grow tax-free in the ROTH after that.
If you expect to realize significant capital gains this year, consider selling some depreciated investments to generate losses you can use to offset some of those gains. You may repurchase those assets later, however be aware of the "wash sale" rules which won't apply if you wait at least 31 days to repurchase after the sale of the same asset. Have you opened a new location, redesigned your shop, or added a new product or service? Don't keep it to yourself, let folks know.
If you are a W2 employee and you were hit with a huge tax bill last year because you did not withhold enough taxes from your paycheck, we recommend you check up on your 2021 withholdings. We more than likely has this discussion earlier this year and we hope you applied those changes. In addition you can use the IRS Tax Withholding Estimator Tool and information from your most recent paystub to see if you are on track.
If you have income not subjected to withholding like investment income, business income etc, please ensure that you are current on paying in your quarterly estimated taxes. Fourth quarter estimated taxes are due on January 17, 2022. Reach out to us if you need help calculating the correct amount to pay in to avoid tax penalties.
Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers) and reduce their taxable income. Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area.
As a reminder, for donations under $250, you need a bank record, such as a cancelled check or credit card statement. For donations that exceed $250, you should obtain a written acknowledgement from the charity that shows the date of the contribution, the amount, and states whether you received any goods or services in exchange for your donation.
Did you have a child or have one outgrown their dependency status? Did you get married or got a divorce? These changes will affect your taxes and you will need to plan accordingly. It is important to consult with us, your tax expert before implementing any tax strategies. Please send us your questions, comments and concerns; we will love to explore these and other opportunities to reduce your tax obligations.
Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.
The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if you did not receive your EIP and you qualify, this additional amount will be captured and claimed on your 2021 income tax return. We can help you plan for any modification now.
If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis.
We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.
Another thing to note that's different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.
With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your tax and financial plan.