New York, NY, November 1, 2021– Steven B. Zelin, CPA, Managing Member of Zelin & Associates CPA LLC in New York City, The Singing CPAⓇ, has some yearend tax tips to offer to those businesses and individuals who really don’t like paying taxes. “There are tax changes being considered in Washington for those with higher income on capital gains taxes and estate and gift taxes among others. Here are yearend strategies to be considered for everyone,” said Mr. Zelin.
- Disaster Losses. – Tax rules allow businesses to claim certain losses attributable to a disaster on a prior-year tax return. This is meant to provide quicker refunds. This could be for those with losses from Hurricane Ida.
- Opportunity Zones are one of the most powerful incentives ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can an investor potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but they only recognize 90 percent of the gain if they hold the investment for five years. Additionally, if they hold the investment for 10 years and satisfy the rules, they pay no tax on the appreciation of the opportunity zone investment itself.
- Realize losses on stock in any non-retirement accounts. Selling stocks at a loss can offset capital gains and income taxes. It may be advisable for you to meet with your financial advisor to discuss any year-end trades you should consider making. Capital losses can be carried forward to offset future gains and up to $3,000 of losses can be deducted in the current year.
- Deferring income to the future can help you reduce taxes this year. Individuals who are self-employed may have a greater opportunity to take advantage of this strategy. For cash basis taxpayers, income is taxed in the year it is received. You will still have to pay taxes on the income at some point, but this strategy might be useful to individuals who anticipate having a lower income next year.
- Tax-loss Harvesting. – Many people believe we are due for a recession, but for most investors, 2021 was a year that can come with hefty tax consequences. That makes this a good time to consider selling any losing investments to generate a tax deduction and cushion the blow. You can use those losses to zero out capital gains, and then deduct up to $3,000 a year against ordinary income. Losses in excess of that can be carried forward to future tax years until the balance is used up.
- Optimize your QBI. – If you are an S-Corp, see which salary will give you the best QBI (Qualified Business Income) deduction. The QBI deduction begins to phase out for single taxpayers with an income above $164,900 for all taxpayers, aside from joint filers where the phase out begins at $329,800. One way to reduce taxable income to optimize your QBI is with a contribution to a retirement plan, or a Roth 401(k). Sole proprietors and partnerships also may be eligible for the QBI deduction.
- Contribute to Retirement Accounts. – Another year of unsteady income has prompted tax advisors to discuss so-called Roth conversions with clients. This tactic allows someone to convert funds in a pre-tax individual retirement account or 401(k) to an after-tax Roth IRA. Investors owe taxes on the converted money, but the Roth IRA provides tax-free future growth. If you had a particularly lousy 2021, you might be better off eating some taxes now.
- The forms have changed but the calculations of the tax are basically the same. You need to contribute to your 401(k) or similar retirement plan by December 31 to count for 2021. On the other hand, you have until April 15, 2022 to set up a new Individual Retirement Account (IRA) or add money to an existing IRA and still have it count for 2021. For 2021, you can contribute up to $19,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older). (Roth contributions are not deductible, but Roth qualified distributions are not taxable.) The Tax Cuts and Jobs Act of 2017 also increased the required minimum distribution age to age 72, permits IRA contributions to continue after age 70 ½ and accelerates the required minimum distribution rules for designated beneficiaries.
- Charitable Giving.- The CARES Act created an above-the-line deduction of up to $300 for cash contributions from taxpayers who don’t itemize. To take advantage of this provision, taxpayers should make sure to donate before the end of the year. Pay certain deductible expenses before December 31. If you plan on giving to charity before the end of the year, remember that a cash contribution over $250 must be documented in order to be deductible. With a $12,550 standard deduction for single filers ($25,100 for couples filing together) in 2021, it’s tougher to itemize and claim the write-off. But many combine multiple years of donations, known as “bunching,” to clear the standard deduction thresholds.
- Retirees age 70½ and older may consider a so-called qualified charitable distribution, a direct payment from pre-tax IRAs. Someone age 72 and older may use it to satisfy their annual required minimum distribution.
- This is also a time to make annual exclusion gifts before yearend to save gift tax and estate tax. You can gift $15,000 per person ($30,000 as husband and wife) in 2021 to an unlimited number of individuals free of gift tax. However, you cannot carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
- Donating personal property (in good condition) is also possible. If you haven’t already been through your closet, garage, basement, and attic to do some cleaning up, now’s the time to get motivated. Bringing your tangible property to a thrift or second-hand store results in recycling of your old items and, with a receipt, a tax break for you. Remember that if you estimate the value of your donated goods to exceed $5,000, then you will need a professional appraiser to validate that amount to claim the deductions on your taxes.
- College Savings Plans. For people with children under age 18, and especially under age 14 to consider contributing to a qualified tuition plan (Section 529 plan). Unlike a Coverdell Educated Savings Account (CESA) there are no AGI limits on contributions to 529 plans. However, distributions of earnings from a 529 plan are tax-free only if used to pay for higher education expenses (college and above). 529 beneficiaries can be changed if funds remain in the plan and the original beneficiary no longer has any need.
- State Residency Status. – For individuals who split their time in two different states throughout the year, now is an excellent time to consider where you may be taxed as a resident for 2021. To make it more likely that the high-tax jurisdiction will respect the move and not continue to tax you as a resident, you should track the number of days you are spending in each jurisdiction, and also gain an understanding of the definition of residency for the applicable states.
- Review Income and Potential Deductions. – Generally, you want to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes. Some expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Itemizing your deductions only makes sense if the total exceeds the standard deduction. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses. This may mean moving a procedure into this year or postponing it until next year.
- Double-check Your Withholding. – Taxpayers should make sure their withholding and estimated taxes align with what they actually expect to pay. If they find themselves in danger of being penalized for underpaying taxes, they can make up the shortfall through increased withholding on their salary or bonuses. A larger estimated tax payment at the end of the year can still expose them to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for yearend wages can save them in penalties. Make sure you’re not having too much (or too little) taken out of each paycheck. The same holds true if you make quarterly estimated tax payments.
- Be Aware of Your Obligations to States. – Don’t forget that state and local governments impose their own filing and payment responsibilities with various income, sales, payroll, and property taxes. States have become more aggressive in taxing corporations that are not physically present in their states, but have sales to customers or payroll or rent paid in those states. Holding off on paying state and local taxes to the extent possible and pushing them into 2021 if Biden wins the presidency, since he has favored repealing the state and local tax limitation. This wouldn’t apply to those who use the standard deduction or don’t have a lot of income, but a couple making $150,000 that lives in a high-tax state might want to push out their state and local taxes.
- Make a Fourth-Quarter Estimated Tax Payment. If you didn’t pay sufficient taxes throughout the year, you’re going to owe taxes to the IRS when you file your tax return. You may have to pay a penalty also. This is because you either didn’t withhold enough taxes from your weekly paycheck or you’re self-employed and you didn’t pay enough in estimated tax payments. To avoid penalties, make an estimated tax payment by January 15th.
Most of all, Mr. Zelin advises working with a CPA or other financial advisor who can provide the best advice as you prepare your taxes.
Steven B. Zelin, CPA is an active member of several tax committees of the New York State Society of Certified Public Accountants and serves as Chair of its Career Committee. He is also a member of the American Institute of Certified Public Accountants and its Peer Review Committee.
Mr. Zelin has educated the public about the accounting professional through his role as The Singing CPAⓇ, now a registered trademark. His sense of humor added to his songs, Tax Deductible, Dear IRS, If You Don’t Like Paying Taxes, Audit Client Blues and others featured on his CD, The Singing CPAⓇ introduced in 2008. He regularly sings on the steps of the post office on the income tax filing deadline and before many non-profit and small business groups.
Mr. Zelin may be reached directly at 646-678-4496, extension 101 or firstname.lastname@example.org.