2021 has flown by and before you know it 2022 will be here! Before the year comes to a close, there are a few simple tax planning items to consider to potentially help reduce your 2021 income taxes.
More giving could mean more tax savings! Temporary 2021 tax changes allow for all individuals to claim a deduction up to $300 for individuals, $600 for married filing joint, for cash contributions to qualifying charities even if you take the standard deduction. Taxpayers who itemize have the potential to claim a deduction for charitable contributions to qualifying organizations up to 100% of their adjusted gross income of the 2021 tax year. The contributions must be made in cash to public charities and not to donor-advised funds or supporting organizations.
Retirement Account Contributions
Funding your retirement account has the potential to decrease your tax due as contributions to 401(k)s, SEPs, and IRAs reduce your taxable income. There is also the possibility of converting a traditional IRA to a Roth IRA if eligible. This will result in taxable income for 2021, but will allow for tax free growth and distributions in the future.
Contributions to a qualified Health Savings Account are excluded from gross income and therefore reduce your taxable income. If you participate in an HSA, consider fully funding your HSA: $3,600 for individual coverage and up to $7,200 for family coverage, to boost your tax savings.
Generally gifts are reportable, but exclusions do apply. For tax year 2021 the annual gift exclusion allows for tax-free gifts up to $15,000 per individual (other than your spouse) without it counting towards your lifetime gifting exemption and without filing a gift tax return.
Operating Deductions for Business
Consider the timing of year end payments if this is an option. By accelerating some payments into 2021 there is the potential to decrease income. On the contrary, deferring some payments until 2022 could decrease income in 2022. If proposed tax increases are passed, it might be more beneficial for some businesses to pull income into 2021 because the current tax rates are lower, and deferring expenses into 2022 to lower income that would be taxed at a higher rate.
Machinery and equipment purchased and placed in service during 2021 may be eligible to claim a 100% bonus first year depreciation deduction. This deduction is eligible for equipment bought used (with some exceptions) or new. There is no proration based on the length of time that an asset is in service and the deduction is available even if qualifying assets are in service for only a few days in 2021. Purchasing equipment in 2021 could produce significant tax savings.
De Minimis Safe Harbor
Materials and supplies may be eligible for deduction rather than capitalization by taking advantage of the de minimis safe harbor election. Materials, supplies, and other minor assets which have a low cost may be eligible for immediate expensing as long as they are not required to be capitalized under the UNICAP rules by making the de minimis safe harbor election. Consider purchasing qualifying assets in 2021 in order to decrease income.
These are just a few tax strategies to consider to save taxes for the tax year 2021. Make sure to take advantage of these planning items before year end to obtain the most benefit.
If you have any questions, please contact your HM&M advisor.
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