Tax planning over the past two years has felt like a roller-coaster ride at times — in part due to a series of pandemic-inspired stimulus programs and related legislation.
Despite these changes, there are still a few tried-and-true strategies that individuals and business owners should consider when looking to reduce their 2021 tax liability.
Consider accelerating deductibles and deferring income
This is a reliable strategy every year — with the exception of taxpayers who expect to land in a higher tax bracket next year. The Build Back Better Act (BBBA), which has been moving through Congress for several weeks, could potentially upend this tactic in future years. Although, the BBBA could change significantly before, or if, it becomes law.
Donating to charity can help, even if you don’t itemize
For 2021, taxpayers can take the standard deduction and claim an above-the-line deduction of $300 ($600 for married couples filing jointly) for cash contributions to qualified charitable organizations. The adjusted gross income limit for cash donations is 100% for 2021 and will return to 60% for 2022. Keep in mind that donations to donor-advised funds and private foundations don’t qualify.
Consider converting funds in traditional pre-tax IRA to after-tax Roth IRA
Roth IRAs have no required minimum distribution (RMD), and distributions are tax-free. Taxpayers are required to pay income tax on converted funds, but it’s better to do so while subject to lower tax rates. Similarly, taxpayers who convert securities that have dropped in value may experience lower taxes now than in the future — subsequent appreciation while in the Roth IRA will be tax-free.
Consider harvesting if you showed significant capital gains
Losses of up to $3,000 ($1,500 if married and filing separately) that exceed the gains for the year can be applied against individual income. The remaining losses can be carried forward indefinitely. Taxpayers who itemize deductions could compound their tax benefit by donating money from selling a depreciated investment to a charity — simply offset realized gains and claim the charitable contribution deduction.
Deduct research and experimental (R&E) expenses in the year they’re incurred or paid
Businesses can also capitalize and amortize the costs over at least five years. Starting in 2022, R&E costs cannot be deducted in the year incurred. Instead, business owners must amortize those expenses incurred in the U.S. over five years and expenses incurred outside the country over 15 years.
Consider accelerating expenses into the current tax year and deferring income until next year
This is a solid strategy for businesses that use cash-basis accounting and expect to be in the same or a lower tax bracket the following year. Business owners can deploy this strategy by delaying billing until later in December, stocking up on supplies or rushing bonus payments.
Reduce taxes by making capital purchases before December 31
Business owners can deduct 100% of new and used qualified property costs in the year a property is placed in service. Examples include computer systems, software, vehicles, machinery, equipment and office furniture. Bonus depreciation also applies for qualified improvement property placed in service during 2021. Special rules apply to property with a longer production period. Remember that if you face higher tax rates going forward, depreciation deductions would be worth more in the future.
Dine on the company dime
Qualifying business meals are still 100% deductible before falling back to the usual 50% in 2023. Meals and expenses from company holiday parties can often qualify for the deduction as well.
Keep in mind that these strategies don’t apply to every individual and every business. Consider all the possible scenarios that could impact you, including changes resulting from the potential passage of the BBBA.
KraftCPAs in Chattanooga supports businesses and individuals with accounting and tax service expertise.
Learn more by visiting their website, here.
Spencer Mercer is a member of the tax services team at KraftCPAs in Chattanooga, where he works with individual and business clients on tax research, planning and consulting issues.
Contact Spencer at [email protected] or (615) 346-2409.