We’re halfway through November, with holidays on the horizon, making it a great time to do a quick check on end of year planning. Tax planning is a year round activity, but now is the time to make sure you’ve considered everything that could impact your tax situation for 2021.
Here are our top 10 tax tips to consider before year end:
- Make sure your tax withholding from your paycheck is appropriate. This is especially true for anyone who has gotten married or divorced, or changed jobs during the year. The IRS offers a withholding estimator that can help you see if you need to make any changes to your W-4.
- This is the time of year when companies are doing open enrollment. Many employers offer benefits that can defer or reduce taxable income. Make sure you understand what benefits are available to see if any might help your situation. This could include:
- Making sure you’re contributing enough to your retirement plan to maximize any employer match
- Contributing to tax-free flexible spending or dependent care benefit accounts
- Taking advantage of a Health Savings Account if one is available
- For self-employed individuals and business owners, if this is a higher income year, consider deferring revenue, if possible, into 2022. On the flip side, also consider accelerating expenses. We never advise spending money just to create a deduction. However, this is something to consider for year end tax planning. If there are expenses on the horizon, such as new equipment, or new investments that could help the company expand or become more efficient, it may be worth looking at incurring those expenses in 2021 rather than waiting.
- Also for self-employed individuals and business owners- now is also the time to look at your company’s retirement plan. There are several plans that can benefit business owners. SEP or SIMPLE IRAs, a 401(k), including a solo 401(k) if applicable. Each plan has plusses and minuses in terms of how much can be contributed and potential cash flow requirements to cover other employees. But the right plan can be extremely helpful in deferring income.
- Now is also a good time to review business structure (sole proprietor, LLC, corporation, partnership). There are pros and cons to each that change as your business grows and evolves. It’s a good opportunity to evaluate if a different tax structure makes sense. For example, if you should consider filing an S Election and how that will impact your business next year.
- For individuals that are subject to required minimum distributions (RMD) from their retirement account, make sure that you have pulled an appropriate amount before year end. If not, and you are over 70 ½, you may want to consider if a qualified charitable distribution (QCD) makes sense. For individuals who are taking the standard deduction, but still intend to make charitable contributions, these donations can still allow you to reduce taxable income while getting the benefit of the standard deduction.
- Evaluate your investment accounts. Do you have realized capital gains for the year? If you are sitting on investments that have lost money, selling them this year to offset gains will help lower taxable income.
- For millions of taxpayers with children, the IRS has been sending advanced payments of the expanded 2021 child tax credit. If your tax situation has changed between 2020 and 2021, and you know you will not qualify for the full credit, you can let IRS know and stop the payments now. This year end tax planning can help prevent a situation where you might owe more on your 2021 return.
- Consider converting money from a traditional IRA to a Roth IRA. With tax rates at historically low levels, it presents a great opportunity to take a hit now on the conversion. The Roth will grow tax-free and be tax-free when you take qualified distributions down the road. Careful analysis needs to be done to consider other income for the year. You want to make sure a conversion won’t have negative consequences, such as pushing you into a higher tax bracket.
- Evaluate whether an insurance policy through the ACA marketplace makes sense. The American Rescue Plan changed eligibility and subsidy amounts. People that may not have qualified before might now be able to take advantage. Open enrollment is now through December 15 to start coverage by January 1. You can check your eligibility at https://www.healthcare.gov/.
These are some of the most common issues we see taxpayers dealing with over the course of the year. Thoughtful planning and implementation can yield long term benefits. We hope you find this year end tax planning guide helpful. As with any tax advice, your situation will dictate what makes the most sense to focus on. If you have any questions about the above tips, or how they might benefit you directly, please contact us. We can tailor a plan that best fits your specific needs.