2021 Here are some year-end tax planning ideas to accomplish before New Year’s Day.
Out-of-pocket medical expenses that exceed 7.5% of your gross income are deductible as an itemized deduction. If your year-to-date medical expenses are already close to this threshold, consider having elective procedures that you’ve been putting off and also make payment before year-end.
State and local taxes are deductible up to $10,000. This includes a tax on real property, automobiles, and wages. If your state and local taxes are less than $10,000, consider paying the fourth quarter state estimate before year-end, rather than on January 17th.
- Make your January 2022 payment in December 2021.
- Home mortgage interest is deductible for the first $750,000 or principal, or $1,000,000 if the loan originated before December 14, 2017.
- Combine your planned charitable donations for both 2021 and 2022 this year if you normally don’t itemize deductions. The standard deduction is $12,550 ($25,100 for a joint return).
- Contribute appreciated assets, such as stocks or shares in mutual funds, that have been held at least one year, and you can deduct the fair market value of the stock at the time of the gift. The appreciation of the donated shares is not taxable to you.
- Establish a Donor-Advised Fund. This allows a larger charitable deduction this year, and flexibility to distribute smaller annual amounts to charities over many future years.
- Deduct up to $300 ($600 for a joint return) of charitable cash donations, but not to a donor-advised fund, if you claim the standard deduction.
- Claim charitable deductions greater than $800 ($1,100 for a joint return) on your Colorado tax return if you don’t itemize.
- Colorado provides a 50% credit for charitable contributions to a qualified organization that promotes child care.
- Colorado also provides a 25% credit for contributions to targeted enterprise zone projects.
Estate Planning and Gifting
- Currently the lifetime exemption is $11.7 million for asset transfers made during your lifetime or at death. If you expect your estate to potentially exceed this amount, consider taking advantage of this historically high exclusion and make current gifts.
- Take advantage of the annual gift tax exclusion. You and your spouse can each give up to $15,000 per person in 2021 without reducing your lifetime exemption. This means married parents can transfer up to $60,000 to their married child and spouse, free from gift tax. Recipients do not pay income tax on gifts.
- If you are thinking of selling appreciated securities and you hold them for at least one year, the gain is taxed at long-term capital gains rates, rather than as ordinary income. The gains will be taxed at rates as low as 0% for those already in low-income tax brackets, but not higher than 23.8% for higher-income taxpayers.
- Sell assets that have losses to offset the gains this year. This is known as tax harvesting. Be aware of wash sale rules. Losses are disallowed if you purchase substantially identical securities within 30 days before or 30 days after the sale that generated the loss.
- Municipal bond interest is excluded from Federal income tax. The interest may also be excluded from state income tax if the bond is from your home state.
- REIT dividends and publicly traded partnership income are eligible for a 20% deduction.
- Sale of your primary residence may qualify for part or all of a $250,000 gain exclusion ($500,000 for a joint return). Many homes appreciated substantially during 2020 & 2021 and sale of your home may now be partially taxable.
- Review year-end Required Minimum Distributions from IRAs. RMDs are required in 2021.
- You are not required to take your first RMD until the year of your 72nd birthday if you have not started taking them.
- Donations directly from your traditional IRA to a charity can offset your RMD dollar for dollar. Direct transfers of up to $100K are excluded from income.
- Maximize your 401(k) deferral by December 31st. You can defer up to $19,500, or $26,000 if you are 50 or over. The deferral limit increases $1,000 for 2022.
- You may still repay part or all of the 2020 COVID distribution from your retirement account and claim a tax refund.
- Maximize your SEP-IRA contribution for the lesser of 25% of net earnings from self-employment or $57,000. Contributions can be made through October 17, 2022, if your tax return is extended.
- Maximize your SIMPLE IRA contribution of $13,500 ($16,500 if you are over 49).
- Contribute up to $6,000 ($7,000 if you are over 49) to an IRA until October 17, 2022, if your tax return is extended. Tax-favored contributions are limited by participation in other retirement plans and by gross income.
- Evaluate inherited IRAs. If the IRA owner died after 2019 and you are not the spouse, you may be required to distribute the inherited IRA in ten years.
- Convert non-traditional IRAs to ROTH IRAs this year. This common planning technique may be gone soon.
Contribute to your child’s or grandchild’s 529 account. Contributions to a qualified Colorado-based plan are fully deductible on your Colorado income tax return, saving you 4.5% of the contribution. You and your spouse can contribute up to $150,000 for each beneficiary without reducing their lifetime giving exemption. In 2022, Colorado limits the deduction to $20,000 ($30,000 for a joint return) for each beneficiary.
HSAs and FSAs
- Use the remaining balance of your flexible spending account before year-end. Check with your human resources department to learn if more than $550 can be carried over to 2022.
- Contribute up to $2,750 to a healthcare flexible spending account and up to $5,000 ($10,500 for a joint return) to a dependent care flexible spending account.
- If you start coverage under a high-deductible health insurance plan, eligible for an HSA, you and your employer can contribute a total of $3,600 for individual coverage or $7,200 for family coverage. If you are over 54, you or your employer can contribute an extra $1,000. Contributions can be made through April 17, 2022.
- Newly purchased qualified electric and plug-in hybrid vehicles may qualify for the federal tax credit of up to $7,500. This credit is limited by battery size and manufacturer’s production.
- Home charging stations may qualify for a federal tax credit of up to $1,000.
- Colorado’s EV tax credit is up to $2,500 for newly purchased eligible plug-in vehicles ($5,000 for medium-duty electric trucks).
Withholding & Estimated Payments
- Hanson&Co. can help project your 2021 federal and state tax liabilities so that you can adjust your estimated payments as needed.
- Fourth-quarter federal and state estimated tax payments are due January 17, 2022.
- Accelerate 2022 planned operating expenses and capital purchases. Purchases using credit cards are expenses in the year purchased, not the year the credit card is paid.
- Meals are 100% deductible if purchased from a restaurant in 2021 and 2022. Other meals are 50% deductible, except that the published per diem rate for meals ($59-$79) is 100% deductible. Entertainment is not deductible.
- Pay partial or annual bonuses before year-end.
- Many new and used asset purchases and tenant improvements qualify for 100% bonus depreciation in 2021 and 2022. Consider making planned 2022 equipment purchases and capital improvements prior to year-end. Bonus depreciation will be reduced to 80% in 2023.
- Contact your payroll provider to add health insurance premiums to wages and salary for S-Corporation shareholders that own at least 2% of the company.
- Net Operating Losses generated in 2021 must be carried forward to 2022 and are limited to 80% of excess taxable income.
- Installment sales spread income recognition over several years, reducing income tax this year.
- 1031 Exchanges defer gain recognition for sale of real property if certain conditions are met. Two of these conditions are to identify the property you will purchase in 45 days and to close in 180 days from the date of sale.
- Gain from the sale of a business may not be subject to the Net Investment Income Tax (3.8%) for Active partners and shareholders.
- The Employee Retention Tax Credit expired on September 30, 2021, for most businesses. There is still time to claim the quarterly credit for 2020 and 2021.
- Businesses must be pre-certified for the Colorado Enterprise Zone program by December 31st to be eligible for 2022 tax incentives.
- Pass-through Income from many businesses and profit from sole proprietorships may qualify for a special 20% income deduction on individual tax returns.
- Excess business losses exceeding $250K ($500K on a joint return), are not deductible in 2021 but will carry forward to 2022.
Many of these tips apply only to certain situations so it is important to discuss how each will benefit your individual situation. If you have questions about the information outlined above or would like to schedule a year-end tax planning review, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.