Robbin B. Brophy, EA
‘Tis the season to be…planning? Not how the song goes but it very well should be. I often hear from taxpayers in the months of January through the end of filing season in April looking for advice on saving income taxes they owe for the previous year. Unfortunately, there is very little a taxpayer can do other than plan for the current year. Once December 31 ends with Auld Lang Syne being sung, there is nothing more we can do to reduce someone’s tax liability. So, begin planning now to reduce the tax you will owe in April.
Included in the CARES Act, cash contributions up to $600 to qualifying charities are deductible on 2021 individual income tax returns regardless of whether or not a taxpayer itemizes deductions or takes the standard deduction. Many taxpayers who have lost the ability to deduct charitable contributions because they no longer itemize may still receive a deduction up to $600. Cash contributions include those made by check, credit or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with volunteer services.
The annual contribution for employees who participate in 401(k), 403(b), most 457 plans and the government’s Thrift Savings Plan is $19,500 for 2021, increasing to $20,500 for 2022. The catch-up contribution limit for employees 50 and over remains unchanged at $6,500. The limit on annual contributions to a SIMPLE retirement plan is $13,500 for 2021 and $14,000 for 2022. Annual contributions to an IRA remains unchanged at $6,000 with the catch-up for individuals over age 50 of $1,000.
Business owners and self-employed individuals should ensure that all expenses are paid by December 31, 2021 if a taxable profit is expected. Determine whether new equipment is needed and if so, you may purchase and deduct the cost assuming the equipment has been placed into service before the end of the year. A common year-end expense is for employee bonuses. Often employers do not include these in payroll because of the taxes that have to be withheld. Keep in mind that any gift to an employee should be included in payroll and reported on Form W-2.
Get ready for tax season early by gathering receipts and making sure that accounting records are up to date. Organized tax records make preparing a complete and accurate return easier. Taxpayers should keep end of year documents including: Letter 6419, 2021 Total Advance Child Tax Credit Payments in order to reconcile advance Child Tax Credit payments; Letter 6475, Your 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit and; Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage.
Double check the amount of income tax that has been withheld from paychecks to determine if you should adjust your withholding prior to the end of the year. Planning now could make a huge difference in what you owe later.
Robbin Brophy is an enrolled agent, licensed by the US Dept of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. Call (828)558-4300 for more information.
Originally printed in Positively Haywood by Vicinitus; vicinitus.com