End of Year Tax Planning Tips
As we look forward to celebrating the upcoming holiday season, the last thing on our mind is taxes. However, tax season is just around the corner. Planning ahead helps you prepare accurate returns and avoids delays in processing which can slow down refunds. The IRS recommends that you take the following steps now.
- Gather and organize your tax records. Do not file your return until you have all the documents you need such as:
-W-2s, and 1099-NEC
-Other records of income such as unemployment, retirement/pension, interest, and dividends
-Sales of real estate, stock and other property
-Receipts for deductible expenses
- Calculate your withholding
You are required to pay your taxes throughout the year either through withholding or estimated payments. Failure to pay enough taxes into the system can result in a penalty. (See https://magdaabdogomezlaw.com/need-know-tax-withholding-new-tax-act/) Although there is not much time left to adjust your withholding, now is the time to check and consider making an adjustment to your withholding or making an estimated tax payment by January 18, 2022.
- Itemized/Standard Deduction (See https://magdaabdogomezlaw.com/itemized-deductions-new-tax-act/)
The standard deduction for 2021 has increased to $12,550 for single taxpayers, $18,800 for heads of household and $25,100 for joint filers. This increase, coupled with the limitation on what constitutes an itemized deduction, will generally result in the standard deduction exceeding the itemized deduction.
Charitable contributions can be deducted even if you do not itemize. The deduction is limited to cash contributions up to $300 ($600 for joint filers).
If you plan to itemize deductions, then you should start gathering documentation of the expenses which qualify as itemized deductions such as medical expenses, mortgage interest, real estate taxes, sales taxes, charitable contributions and casualty losses incurred as result of federally declared disasters
It is always a good idea to compare the itemized deduction with the standard deduction to determine which is higher. Now is the time to make that determination. If you are close to the limit, you can accelerate medical and charitable expenses into 2021 so that the itemized deduction is higher than the standard deduction. Note that medical expenses in excess of 7.5% of your adjusted gross income are deductible. In 2021 cash charitable contributions are deductible up to 100% of your adjusted gross income.
- Harvest your Investment Losses
If you have realized capital gains during the year and are planning to sell capital assets determine whether any of these sales will generate losses. If so, sell off the asset in 2021 so that you can offset the capital gains with the capital losses. If you have more losses than gains you can offset $3,000 of other income with the losses. Any additional losses can be carried over to next year.
- Maximize contributions to retirement plans
The contribution limit for a 401(k) plan is $19,500 if you are under the age of 50. If you are over 50 you may contribute $26,000 to a 401(k). The deadline to contribute is December 31, 2021.
The contribution limit for an IRA is $6,000 if you are under the age of 50. If you are over 50 you may contribute $7,000. The deadline to contribute is April 15, 2022.
- Child Tax Credit: IRS Letter 6419
If you are entitled to the child tax credit and received the advance child tax credit during 2021, you will need to reconcile the advance credits received with the amount you are eligible to claim on your return. You will receive IRS Letter 6419 at the beginning of 2022. This letter will contain the information needed to reconcile the child tax credit. You can also access this information by creating an online account with the IRS and going to the Child Tax Credit Update Portal.
- Economic Impact Payment (Stimulus): IRS Letter 6475
If you are entitled to an economic impact payment for 2021, and did not receive it, or received only a portion of the stimulus, you can claim the credit on your return. In order to determine the amount of credit which you are eligible to claim you will need to reconcile the return with IRS Letter 6475. If you have not received the letter, you can access the information on your online IRS account and viewing the amount of the payment received in 2021.
- Advance Premium Tax Credits: Form 1095-A
If you had health insurance through the health insurance market place and received advance payments of the premium tax credit, you will receive Form 1095-A. You will need this form to reconcile the advance payments and complete Form 8962 on your return. Failure to include Form 8962 and reconcile the advance payments will delay a refund. If you received Form 1095-A you are required to file an income tax return even if you are not otherwise required to do so.
Nothing contained in this article is intended to be legal or financial advice. The tax laws are complex and whether these laws apply to you depends on your personal circumstances. It is in your best interest to timely explore which laws would apply to you so that you can take any necessary steps prior to December 31.