Personal Finance - Arla Wallace
Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

End of Year Tax Planning

End of Year Tax Planning

It’s easy to procrastinate when it comes to tax planning. While taxes are not a topic that many individuals enjoy, taking time to plan for tax season can enable you to find ways to lower your tax burden and reduce the time required to file your tax return. Consider the list of deductions below that are available for tax year 2021.

Donations

Although many taxpayers will opt for the 2021 standard deduction ($12,950 for individuals and $25,100 for married couples), the IRS has expanded tax benefits for gifts to charities from individuals who do not itemize. Cash contributions made to a charitable organization can be claimed for a deduction up to $300 for individuals and $600 for married individuals filing a joint return. In conjunction with a temporary increase on the limits on charitable contributions provided for in the CARES Act, taxpayers who itemize can deduct up to 100% of adjusted gross income (AGI) for contributions made to a qualifying charity in 2021, up from the previous law’s 60 percent. The 100 percent of AGI limit does not apply to contributions made to donor-advised funds, however.

Additionally, IRA owners who are at least 70½ years of age or older continue to be eligible to make tax-free charitable contributions. The contributions are limited to $100,000 per year and the transfer must be made directly from an IRA to a qualifying charity. The IRA account holder can count the transfer as part of their required minimum distribution (RMD) for the tax year and will not have to pay income taxes on the distribution.

Retirement Plans

For those individuals who participate in 401(k) and 403(b) plans, contributions are limited to $19,500 for tax year 2021, and $26,000 for individuals age 50 and older. Contributions must have been made by December 31 of 2021. In addition, individuals can also contribute a maximum of $6,000 to an IRA for tax year 2021, and an extra $1,000 can be contributed for those 50 and older. Contributions made to IRAs must be made by the April 15, 2022 tax filing deadline. By making deductible retirement contributions, individuals can reduce taxable income for the tax year.

Business Deductions

Self-employed? Timing income and expenses at year-end can help to lower the amount of your business income that will be subject to income tax. A number of deductions are available to business owners. The home office deduction can be taken for a workspace in the home that is used regularly and exclusively for your business. There are two choices when calculating the deduction amount—the standard amount and the simplified amount. The standard method requires calculation of actual home office expenses while the simplified amount is calculated based on an IRS-determined rate by square footage. A deduction for health insurance premiums is available to the self-employed who are not eligible to participate in a plan through a spouse’s employer. In this case, all medical, dental, and long-term care insurance premiums can be deducted. New for tax year 2021, meals are 100% deductible business expenses when traveling for business. This temporary deduction applies to food and beverages provided by a restaurant. Food bought from a grocery store or vending machine does not qualify for the full deduction.

Whether you use a tax software to file your own taxes or rely on the help of a tax professional, understanding the tax deductions available for 2021 will better enable you to plan for the upcoming tax filing season.