Tax Insights for 2021: Time for Superbowl Tax Ads

Its Super Bowl weekend. In addition to watching the game, and all of the tax prep company advertising, I usually get a head start on my taxes. I’ve split our thoughts into two sections, the first section is tips for 2021 and the second section is a set of strategic ideas that you should consider now to lower your bill for 2022 and beyond. Keep in mind, these are our general recommendations, and you should always consult with your CPA about whether these are appropriate for your specific situation.

Most tax-payers are taking the standard deduction (>90%), thus the game of searching for novel deductions each year is over. This is for two reasons. First, the standard deduction was increased through the Tax Cut and Jobs Act in 2017. Second, most deductions now phase out as income increases. Therefore, the value of itemized deductions have declined significantly for most taxpayers. So don’t be shocked if the “standard deduction” is right for you.

Best commercial in my opion: (Amazon)

https://www.youtube.com/watch?v=d0UEAr8I9G8

2021 Tips:

Covid-19:

• For self-employed individuals and small business owners that did not receive “sick-leave” as part of their compensation package, a tax credit is available for each day spent out of work dealing with personal Covid-19 infections and/or quarantines. This also covers days spent away from work while caring for children or other dependents who were sick or quarantined (read: out of school) in 2021. The tax credit is a function of your 2019 or 2020 income, whichever is higher. So if you spent time away from your business because of Covid, don’t miss this credit.

• Typically, business losses have a limits to their impact on your current year return and refund. The excess losses can be carried forward to future years. The CARES Act retroactively repealed the limitations on these loses for 2018, 2019 and 2020. It also provided a window for business owners, both passive and active, to recognize those losses and receive refunds in the current year. If your business or an investment was significantly impacted by the pandemic, revierw your returns to see if you can get a refund this year for prior losses.

• You likely cannot deduct your home office unless you are self-employed or are required to work from home by your employer. Telecommuting more often due to Covid does not count. Plus, deductions on your home office may impact capital gains taxes when you do to sell your property, so be wary of this deduction.

Long-Term Care Insurance: Long-term care insurance premiums may be deductible as medical expenses as long as your total medical expenses are greater than 7.5% of your adjusted gross income. There are limits on the amount of premium that can be deducted, so check with your CPA when you file your taxes.

Retirement Account Contributions: You have until the April tax deadline to contribute to retirement accounts for 2021. If your income was relatively high in 2021, consider making IRA contributions to receive a tax deduction now. However, we caution doing this blindly every year. If your 2021 income was lower than usual, consider paying taxes now and receiving preferential capital gains tax treatment on future investment gains. Also, lower income years are great opportunities for ROTH conversions to minimize your total long-term tax liability. Remember, the IRS is in it for the long-haul, so you should be too.

Home Mortgage Interest: Home mortgage is one of the few deductions that remained after the tax law changes in 2017. However, interest is only deductible on balances below $750,000. As home prices have risen, particularly in large metro areas, more homes are crossing that threshold. The good news is that if you purchased your home before 2018, you are grandfathered in to the old $1,000,000 limit, so think carefully about the impact of selling a home acquired prior to 2018.

Strategy for 2022 and Beyond:

Retirement Accounts: We recommend clients have both ROTH and Traditional retirement accounts. You should look to fund ROTH accounts when income is relatively low and traditional accounts in high income years when the deduction is most valuable. Remember, taking a current year deduction and paying a higher rate down the road is not usually beneficial. Like all deductions, IRA deductions phase out as income grows. So discuss your retirement account contributions with your advisor on a regular basis. This is one area you should not “set and forget.”

Retirement Account Contribution Limits for 2022

Retirement Account Beneficiary Designations: This is a great time of year to review your beneficiary designations, especially if you have not reviewed them since the SECURE Act was passed in 2019. The SECURE Act included a variety of changes impacting beneficiary tax treatment. This is especially important if you intend to pass your IRA down to the next generation or to a minor child.

Open a Heath Savings Account (HSA): If you have material medical expenses, which is virtually everyone, then an HSA is a great way to reduce your long-term tax liability. These accounts receive the “tri-fecta” of deductions. The contributions are tax deductible, the account grows tax-free, and distributions for healthcare expenses and some Medicare premiums are not taxed. Even if your medical expenses are not higher than 7.5% of income, an HSA may be a great tax reduction strategy.

Delay or accelerate income: With the 2017 changes in the standard deduction and lower deductibility phaseouts, one of the only remaining ways to manage your tax liability is by managing your income. If you are a partner or outright owner of a business, you may be able to influence whether a business pays income, realizes expenses or sells assets in a given year. Managing your business income alongside your outside income can help lower your long-term effective tax rate and avoid “spikes” that lead to higher tax rates in one-off years. Your advisors should help you manage your total tax picture.

Charitable Deductions to Public (501c3) charities: Lastly, the charitable deduction still exists. Our view is that charitable giving should be based on your personal purpose and goals, not simply  tax strategy. We hope you will consider being generous to organizations that are doing great work around the world. Your dollars count more now than ever before. Many charities are still struggling with decreased doner funding as a result of the pandemic. Whether through your church or other local community organizations, every dollar goes a long way, especially now. And remember, not all “charities” are created equal. Private foundations and political organizations have different tax treatments, so ensure your dollars go to a 501(c)3 organization for full deductibility.