The end of the year is approaching, and the window of opportunity to optimize your tax position for 2021 is closing fast. Here are strategies we recommend everyone consider before the end of the year.
Take advantage of long-term capital gain rates
Our first stocking stuffer recommendation is to take advantage of long-term capital gain rates on investments held longer than 12 months. As your income increases, so do the rates – from 0% to 15% to 20%, with the 20% bracket kicking in with income is over $501,600 for Married Filing Jointly (MFJ) taxpayers. For Head of Household (HoH) filers, the 20% rate applies when your income is above $473,750. For all other taxpayers, it kicks in when your income is more than $445,850.
One capital gains tax strategy many miss is that you may also sell other investments at a loss to help offset the capital gains generated.
And, you may want to consider an Opportunity Zone Investment to defer a current long-term capital gain and receive tax-free appreciation on the invested capital gain.
Avoid Net Investment Income tax (NIIT) when possible
Net Investment Income Tax (NIIT) is an additional 3.8% tax on any investment income. It applies when your Adjusted Gross Income (AGI) exceeds $250,000 for MFJ, $125,000 for Married Filing Separately (MFS), and $200,000 for all other filers.
To avoid this tax, consider tax-exempt options, offsetting gains with losses, or using an installment sale to spread the gain out over multiple years.
Maximize the itemized
Get the most out of your itemized deductions, so you can be well over the standard deduction.
Medical Expenses up to 7.5% of AGI are deductible in 2021. So get in any last-minute expenses now, including any payments made or charged on your credit card before year-end.
Charitable Donations will continue to allow 100% deductible cash donations to public charities through 2021. For non-itemizers, take advantage of a $600 cash donation. It’s the perfect time of year to donate if you have some catching up to do!
Get the full benefit of benefit plans
Another great tax stocking stuffer idea is to maximize your contributions to certain employee benefit plans. First, consider whether you can increase your retirement plan contributions. In 2021, retirement plan contributions are limited to $19,500 – and if you’re 50 or older, you can contribute an additional $6,500.
If your employer offers a Health Savings Account (HSA), you can contribute up to $3,600 for single or $7,200 for family – and those 55 or older may contribute an additional $1,000.
Minding your business
If you’re a business owner, there are a few more strategies you may be able to put in play.
Section 199A Deduction for pass-through business owners allows a maximum of 20% deduction of business income. However, this deduction has many limitations, which makes it complicated to calculate. If you own multiple businesses and your deduction is limited, try aggregating your activities to reduce that limitation.
For cash-basis taxpayers, explore where you can delay billing and accelerate expenses to reduce your overall net income.
Purchase new assets for your business before year-end. Many businesses can still use Section 179 Expensing Election and Bonus Depreciation to deduct the cost of the asset when purchased instead of depreciating it over its useful life.
Remember that Bonus Depreciation is only applicable for a few more years before the phase-out begins in 2023, so take advantage while you still can!
Take advantage of the Employee Retention Tax Credit (ERTC) while it is still here. Barnes Dennig has a specialized team working hard to make sure our clients are getting the maximum credit of $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021 (for the first three quarters – which means the ERTC is worth up to $21,000 per employee for qualifying organizations). Take our 3-minute ERTC QuickTest to see if you qualify!
Let’s talk tax
There may be other options to optimize your 2021 tax planning before it’s too late. Connect with one of our top tax pros to discuss your unique situation. We’re here to help.