As we navigate the hustle and bustle of another holiday season, many of us are reflecting on the whirlwind that was 2021. We often spend the latter portion of the year looking back on our cherished memories and celebrating. However, there is a looming consideration that should not be missed: year-end tax planning.
In hopes of making your end to 2021 as smooth as possible, we have compiled several tax-planning ideas to help alleviate the pressure of year-end planning.
Tax-planning tips for individuals
• Charitable contributions — Regardless if you itemize or take the standard deduction on your 2021 tax return, everyone can donate to qualified charitable organizations in order to lower their tax bill.
• Charitable contributions for itemizers — Taxpayers that are itemizing their deductions during 2021 can write last-minute checks, or donate stocks, used clothing, and household items in order to increase their itemized deduction for charitable contributions. Usually, the limit is 60 percent of adjusted gross income or AGI. In other words, the amount of cash charitable donations you could deduct generally could not exceed 60 percent of your AGI. For 2021, as in 2020, that limit for cash gifts to qualified charitable organizations has been temporarily suspended.
• Above the line charitable deduction — If you take the standard deduction on your 2021 tax return, you can take advantage of the increased “above the line” charitable contribution deduction under the CARES Act. Taxpayers can now claim a deduction of up to $600 for married individuals filing jointly ($300 for single filers) on cash contributions to qualified charities.
Regardless of the type of contribution deduction you utilize, please make sure to obtain documentation to support your donations.
• Required minimum distributions (RMDs) — RMDs were waived for the 2020 tax year under the CARES Act. However, they resume to normal in 2021. If you are over the age of 72 during 2021, (or you were previously required to take an RMD) you are required to take an RMD from your IRA account. If you fail to take your RMD, the additional tax is 50 percent of the amount you should have withdrawn; therefore, it is crucial that you take your RMD during 2021.
• Pre-tax contributions to retirement and savings accounts — Pre-tax contributions are two-fold; these contributions can help taxpayers reduce their current tax bill and facilitate saving for the future. If applicable, consider maximizing out the following:
- 401(k) contributions: Employees can defer up to $19,500 into their 401(k) plan (or $26,000 if age 50 or older) during 2021.
- Other retirement-plan contributions: If you are not eligible for a 401(k), consider contributing to a traditional IRA with a maximum contribution of $6,000 ($7,000 for those over 50 years old). If you are self-employed, consider contributing to your profit-sharing plan.
- Health Savings Account (HSA) contributions: Participants enrolled in a high-deductible health plan can contribute a maximum of $3,600 for individuals, or $7,200 for families to their HSA.
• Child Tax Credit — In an effort to provide relief to families, the federal Child Tax Credit was increased during 2021 to $3,600 for children under age 6, and $3,000 for children ages 6 to 17. The credit begins to phase out for joint filers with an adjusted gross income (AGI) greater than $150,000 ($75,000 for single filers).
- Beginning in July 2021, the federal government mailed monthly advancements of the Child Tax Credit to families in order to provide an immediate benefit. Historically, families received the entire tax credit at the time of tax-return filing. Unless taxpayers previously opted out and did not receive the monthly advancements, they have already received a portion of their 2021 credit through these advanced payments. Therefore, your credit received with the filing of your tax return may not be as large as in prior years.
- Advanced disbursements were equal to 50 percent of the projected Child Tax Credit. The projected credit was based on the taxpayer’s 2019 or 2020 tax return. Taxpayers can claim the remaining portion of their credit when filing their 2021 tax return.
- Since the advanced payments were based off your prior-year tax return, it is important to note that your actual Child Tax Credit could differ because of your 2021 income. If your AGI increased significantly this year, you may have already received more in advanced payments than you are entitled to. In this case, you could have a balance due with your 2021 tax return.
- In January 2022, the IRS will mail you Letter 6419, which will show the total amount of advance Child Tax Credit payments you received in 2021. It is crucial to provide this letter to your tax professional in order to accurately calculate the additional credit you could be entitled to, or calculate the additional amount owed.
• Rules for net operating loss (NOL) carrybacks — Section 2303 of the CARES Act amended section 172 as revised by the Tax Cuts and Jobs Act (TCJA), section 13302, for tax years 2018, 2019, and 2020. Taxpayers can carry back NOLs, including non-farm NOLs, arising from tax years beginning in 2018, 2019, and 2020 for five years. This has not been extended for tax year 2021.
Tax-planning tips for businesses
• Deductible meals expenses — Under the Consolidation Appropriations Act, business meals are now 100 percent deductible for 2021 and 2022. Previously, meals were only 50 percent deductible. If your business has significant meals expenses, this may help reduce your current-year tax liability.
• Net operating losses — Under the CARES Act, limits on NOLs were suspended, and taxpayers were allowed to apply prior year NOLs against net income in order to reduce their taxable income by 100 percent. However, for tax years beginning after Dec. 31, 2020, you may only reduce your taxable income by 80 percent.
• 2021 asset additions — Business assets placed in service during 2021 may qualify to be 100 percent expensed through the utilization of bonus depreciation or Section 179 expensing. If your company’s net income is high and you have cash to spare, consider purchasing assets eligible for bonus depreciation or Section 179 expensing.
- Bonus depreciation: Businesses can expense 100 percent of an asset’s cost if it was purchased and placed in service during 2021. Eligible assets include tangible assets which are placed in service with a class life of less than 20 years.
- Section 179 Expensing: Similar to bonus depreciation, Section 179 expensing allows businesses to fully expense the cost of qualified assets when they are placed in service. For 2021, the section 179 limit is $1,050,000, which is reduced dollar for dollar when asset purchases are over $2,620,000.
The above list of 2021 tax-planning tips is not all-inclusive. Depending on your specific situation, there may be other opportunities available to reduce your tax expense. Now is the time to contact your tax advisor to discuss your year-end tax planning solutions. It pays to plan.
Katie Rivers is a senior associate in the tax department at Dermody, Burke & Brown. She is a member of the New York State Society of Certified Public Accountants (NYSSCPA) and the American Institute of Certified Public Accountants (AICPA).