Top five 2021 tax planning tips
With only six weeks of the year left, now is the time to be planning tax moves to ensure that you are paying the lowest legal amount of tax possible for the 2021 tax year. Many people hand their books to their CPA in the first quarter of the year and are surprised that they owe more than they thought they would. My goal for ALL of my clients is not only for them to know exactly what to expect when it comes to their tax bill, but to provide them with information well in advance on what they can do to minimize that bill. If your CPA has not yet reached out to you to plan your tax strategy for 2021, now is the time to contact them and ask what you can do to be in the best position possible. If you do not have a CPA, I would be more than happy to speak/meet with you and go through your options to ensure that you have all the information you need to make smart decisions when it comes to preparing for the filing of your tax return. Please contact me via the button in the top right corner of the website. To get you started, below are my top 5 easy tax tips to get you ready for filing your 2021 tax return:
1. Consider selling stocks in your portfolio that have lost money since purchase. These losses can be netted against your gains which in turn reduces your tax bill. If your losses exceed your gains, you can deduct up to $3,000 in losses against your ordinary income.
2. If you itemize your deductions, consider donating stocks with long term capital gains directly to charity. You not only get a deduction for the FMV of the stock as of the date of contribution, but you also avoid paying tax on the gains that the stock has made since purchase.
3. Be sure that you are making the most out of your retirement contributions. If your employer offers a plan that provides a match, then sign up; the match is basically free money. If you are self employed, a SEP-IRA or a profit sharing self employed 401(k) plan should be considered. If you are not covered by a retirement plan at work, consider a traditional IRA or a Roth-IRA. There are many different options, contact me for specific plan discussions..
4. If you have a high deductible health plan, you may qualify to contribute to an HSA account. For a self plan, you can contribute up to $3,600 a year ($7,200 family) which is a straight deduction from your AGI. This is NOT a phased out deduction, so potentially this could be worth up to $2,664 in tax savings per year (37% tax bracket).
5. The fifth tax tip is broad, but make the most of your business deductions. Two things I want to mention in particular. The first is bonus depreciation. The current law states you can deduct 100% of the cost of an asset as long as it’s IRS defined lifespan is 20 years or less. This includes new vehicles, although there are some limitations here. If you are looking at a high profit for 2021, it is certainly a good idea to look at the option of purchasing any new assets you may need over the next few months before the ball drops at midnight on December 31.
Secondly, if you are a sole proprietor or a partner in a partnership, employ your kids aged under 18 ! You do not pay FICA taxes on wages to your kids that are under 18 on a Schedule C or 1065 meaning big tax savings. If you pay them under $12,550, they also do not have to file a tax return (assuming no other earnings) meaning you will get a tax deduction for $12,550 AND your child will not have to declare the income meaning no tax for them. Please note, you must actually employ your kids and have them do legitimate business work. Under audit, you would be required to provide proof of the work they did, such as logs, timesheet etc.
All in all, now is the time to make plans for the 2021 tax year before it is too late. Be sure to either speak to your tax advisor, or send me a message if you do not have a tax advisor and would like some assistance.
Thomas P Perry, CPA
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.