As another year is drawing to a close, tax season is just around the corner. To help you get everything in order for the new year, we’re sharing some helpful tips and information to get you organized with year-end planning.
Year-End Tax Planning Resources To Consider
Invest in retirement accounts
Consider investing in an IRA. You have until April 18, 2022 to make the payment, and the 2021 limit for IRA contributions is $6,000 with an additional $1,000 allowed for taxpayers over 50 years of age by 12/31/2021.
If your income is too high to make a Roth IRA contribution, you may consider making a Traditional IRA contribution and using the “back door” recharacterization rules to get money into your Roth IRA.
Set up a Health Savings Account (HSA)
The limit for an HSA in 2021 is $3,600 for an individual and $7,200 for a family. There is an additional $1,000 allowed for taxpayers 55 or older by 12/31/2021. Be sure to look at maximizing the contributions if you haven’t already done so.
Review your capital gains and losses
If you have realized capital gains during the year, look to see if you have any unrealized losses that can be converted into realized losses to offset the gains. If you have unused capital losses being carried forward, look to see if you have any unrealized gains that could be realized and used against the losses.
Remember to always try to hold investments for at least one year and a day. This allows favorable capital gain treatment as opposed to having your gains taxed as ordinary income.
Understand your required minimum distributions
If you turn age 70 on July 1, 2019 or later, you do not have to take required minimum distributions until you reach the age of 72. However, if you are required to take the distribution, make sure that you take your RMD from your IRA. The penalties for not taking the required distributions are severe.
You also have the ability to make an IRA distribution directly to a charity. This will satisfy your required minimum distribution without having to realize income in that year up to the amount that was given to charity.
The 2021 gift tax exclusion is $15,000 per individual. Remember that you do not get a tax deduction for the amount of the gift, but it could help you with estate taxes in the future.
Know the Infrastructure Investment and Jobs Act issues
The act, signed by the President on November 15, 2021, has a couple of issues for taxpayers to consider.
- The first is an expansion of the reporting requirements for cryptocurrency. The reasoning behind this is an effort to stem the underreporting of cryptocurrency transactions. These provisions have raised some concerns that the requirements are so broad that they apply to people who generate cryptocurrency and to people who do not have the information needed to comply with the reporting requirements.
- The second area of concern is the Employee Retention Credit. The American Rescue Plan Act of 2021 extended the ERC to December 31, 2021. The Infrastructure Investment and Jobs Act eliminates the credit for wages paid after September 30, 2021.
Some of the other changes in place for 2021 tax year are as follows.
Stimulus and child tax credit reporting: If you received a stimulus check in March 2021 you should have received a copy of IRS notice 1444-C at that time. We need that notice to reconcile your stimulus payment to your 2021 tax return.
The IRS has announced that they will send out letter 6419 in January 2022 reporting what they have paid so you can reconcile those payments to your 2021 tax return. Later in 2021, the IRS started paying an advance on the child tax credit unless you opted out of the payment. Please provide that notice to your accountant with your other tax information. Both of these letters will be needed to complete your 2021 tax return.
You can now get a dependent care credit on the first $4,000 spent per child up to $8,000 for two or more children. For those who pay their dependent care expenses through a cafeteria plan/flexible spending plan at work, you can now put $10,500 of pretax wages aside to pay daycare.
For 2021 the charity deduction for those who do not itemize increased from $300 in total to $300 per taxpayer ($600 on a joint return).
Mortgage insurance premiums
The deduction for mortgage premium insurance is extended through 12/31/2021.
The standard deduction rose to $25,100 for those filing married and $12,550 filing single. At this higher level many will find the standard deduction is higher than the taxes, interest, and charity they had in previous years when they were able to itemize.
Teacher supplies deduction expanded
Teachers can include the costs of masks and personal protective equipment in their $250 teaching supplies deduction.
Other Changes Affecting Businesses
1099 filing requirements: For those who file 1099s the IRS requires you to e-file them if you file over 100 1099s and that number drops to 10 for 2022. E-filing the 1099s allows the IRS to document match income reported on the personal tax returns immediately whereas paper filed returns need to be keyed in before this can happen. If you just decide not to file 1099s the penalty is now $280 per 1099 not filed.
- Business meals: The deduction for business meals increases from 50% to 100% for 2021 and 2022.
- Work Opportunity Tax Credit: The work opportunity tax credit for hiring those from certain disadvantaged groups is extended through 12/31/2025.
Work with Gift CPAs
If you have any questions on these items or other year-end tax planning, don’t hesitate to connect with our team. We at Gift CPAs would like to thank you for your business and look forward to a successful new year!