2021 Year End Tax Planning
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. Here’s a look at some issues to consider as we approach year-end.
Key tax considerations from recent tax legislation
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.
Economic impact payments (EIPs)
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 the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return.
If you received an EIP as an advance payment in 2021, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment at tax filing time.
Child tax credit
As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:
Amount has increased for certain taxpayers
Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)
May be partially received in monthly payments
Is applicable to children age 17 and younger
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. The IRS will be sending out Letter 6419 in January 2022 that will provide a total amount of advance Child Tax Credit payments that were disbursed to you during 2021. You will want to compare the amount in the letter to what you actually received; we will request a copy of this letter when we prepare your 2021 taxes.
Charitable contribution deductions
Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers) in 2021. 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.
Required minimum distributions (RMDs)
RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.
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.
State tax obligations related to teleworking arrangements
The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer.
Other year-end individual planning opportunities
Bunching of itemized deductions
If the total of your itemized deductions in 2021 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2021 and taking the standard deduction in 2022 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses that exceed 7.5% of your adjusted gross income, and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.
Health Savings Accounts and Flexible Savings Accounts
You may want to consider health saving accounts (HSAs) if you don’t already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans. If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. If you qualify to contribute to an HSA for 2021, you have until the tax filing deadline (April 18, 2022) to make contributions.
If you have set aside funds in a Flexible Spending Account (FSA) during 2021, be sure you incur enough medical expenses by year end to use up all of your funds. Some FSA plans may offer a grace period in which you have 2 ½ additional months after year end to incur expenses. Check with your employer on the specifics of your FSA.
Although no one likes to lose money on investments, a silver lining is that portfolio losses may provide tax planning opportunities. Selling investments at a loss in a taxable brokerage account (not a retirement account) typically generates a tax deduction. Realized losses can offset realized gains. Realized losses in excess of realized gains can be deducted against other income up to $3,000.
You may be able to take advantage of tax-loss harvesting. This is where you sell an investment that is down to generate a tax-loss, then replace it in your portfolio with a similar investment. Beware of the wash sale rules, which disallow your tax loss deduction if you buy the same investment within 30 days before or after the date you sold it to incur a loss.
If you have had a drop in income, you may be in a lower tax bracket for 2021 than in prior years. It may make sense to convert some of your traditional retirement accounts to Roth accounts before year end. Let us know if you are interested in discussing this strategy.
Business tax matters to note
Business meals –– There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.
Purchases of property and equipment –– With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service. Plus, there are tax-favorable rules that permit qualified improvement property to qualify for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation. Let us help you receive the best tax treatment.
Net operating losses –– If you have significant losses from 2018 to 2020, you may be able to carry those losses back up to five years, which can significantly impact a prior year where there was a tax liability.
Sales and use tax considerations –– States are continuing to make changes to their sales and use tax laws and filing requirements following the U.S. Supreme Court ruling in the case South Dakota v. Wayfair, Inc. Please reach out to us if you have concerns about sales tax for your business.
Fraudulent activity remains a significant threat
Our firm takes data security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
Receive a notice or letter from the IRS regarding a tax return, tax bill or income that doesn’t apply to you
Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information
Receive a robocall insisting you must call back and settle your tax bill
Make sure you’re taking steps to keep your personal financial information safe. Let us know if you have questions or concerns about how to go about this.
Virtual currency transactions are becoming more common; this is an area of increased scrutiny by the IRS. There are many different types of virtual currencies, such as Bitcoin, Ethereum and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts.
Looming potential tax legislation
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 taxes.
Year-end planning equals fewer surprises
There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position. Let us know if you would like to review these opportunities together before year end.