Take these smart steps now to simplify your 2021 tax return
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Next year’s tax return is probably the last thing most Americans think about right now. With millions of individuals and business owners still dealing with their taxes this year, next year can wait.
“The financial industry and the whole country are suffering from compliance fatigue,” said Ed Reitmeyer, CPA and regional tax services partner at Marcum LLP. He says that mid-season tax law changes have made an already difficult year extremely challenging.
“A lot of people have expanded,” said Reitmayer. “Our customer base is a lot more accepting of enhancements because they understand where we are.
“We’re still asking people to send information.”
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However, it is never too early to start thinking about future tax returns. They won’t get any easier in the future. The combination of past tax policy changes, expiry provisions for many of those changes, special pandemic tax rules, and the Biden government’s guarantee of new rules will make future tax preparation as difficult as it was this year.
“After the last two years and the elections, people need to think about a long-term taxable income plan and what it will look like over the next five years,” Reitmeyer said.
The range of considerations is wide.
One of the first things that Thomas Zollars & Lynch’s CPA Ed Zollars considers for customers without a business owner is whether or not they included any prints on their last return. If not, Zollars will determine how close they were to it.
The doubling of the standard deduction in 2017 was one of the most significant tax changes for private individuals in recent years.
“The good news is that the standard deduction for a married couple is $ 25,100 for the next year,” Zollars said. “The bad news is that all of the things people learned in the past in order to lower their taxes have become less and less helpful.”
For those close to the $ 25,000 threshold, Zollars suggests bundling perennial deductions. For example, a couple who pays real estate taxes and mortgage interest of $ 20,000 and typically makes an annual donation of $ 5,000 might instead contribute $ 10,000 every two years. This would allow them to break down $ 30,000 per year deductions and take the standard deduction in the second year.
Wealthier Americans also need to consider the high likelihood that tax rates will rise for both ordinary income and capital gains.
“There is a great fear that the tax rates for investment income will rise,” said Reitmeyer.
How high and for which taxpayers still has to be determined. This may only affect people with an adjusted gross income greater than $ 1 million, or a broader group.
“President Biden appears to have made $ 400,000 a line in the sand,” added Reitmeyer.
The aim is to maximize post-tax growth and prosperity. You want to consider how the situation will affect your balance sheet after years of taxes.
CPA at Thomas Zollars & Lynch
If your future plans are to sell assets that have appreciated significantly, now may be the time to sell them and pay taxes on the profits. The current maximum rate of 20% applies to single applicants earning more than $ 445,850. Paying taxes earlier could be much better than later, as legislative changes often take effect when they are passed.
If you plan to take advantage of the Qualified Opportunity Zone investments to lower your capital gains tax, this is the year you need to act. When valued assets are sold and invested in eligible Opportunity Zone investments in disadvantaged communities across the country, you will receive a 10% reduction in taxable income – but only if you hold them for at least five years, with the 2026 deadline is year.
In other words, this is the last year you can get that 10% discount. Hold the investment for 10 years and you will get a full increase in the cost base for tax purposes (i.e. no capital gains tax).
Estate taxes are also likely to be driven up. Lowering the current $ 11.58 million inheritance tax exemption and increasing inheritance tax rates, while not affecting your current tax burden, can have a dramatic effect on your heirs. Estate planning efforts have increased.
“Since interest rates are low and inflation expectations are returning, the more assets you can invest in real estate, the better,” Reitmeyer said.
For business owners, tax considerations are far more complicated, in large part due to the government’s efforts to help them during the pandemic. “The rules change retrospectively with every new law,” said Zollars. “The benefits get better, but it makes it harder to deal with.”
Here are three main topics that business owners need to consider for tax planning purposes this year.
• Government loans and credits. Zollars suggests that the ERC (Employee Retention Credit) set up last year under the CARES Act could be the number one problem for small business owners.
Previously, companies that had received a loan from the government for a forgivable payroll protection program could not get a loan to retain employees during difficult times. Now you can.
However, a taxpayer cannot claim credit for wages paid with an issued PPP loan. Entrepreneurs must maximize the other eligible expenses on the lending and use labor costs to claim the loan. “You need to look at both programs together to get the most benefit,” Zollars said.
• Loss carryforwards. One reason so many company-owning taxpayers have applied for an extension this year is to find strategies for the favorable rules for carrying back operating losses in the CARES Act. The bill allows companies to carry back losses from the past three years to offset the income they made up to five years ago.
You can get cash refunds by changing the previous year’s returns. Entrepreneurs need to decide whether they need the money now or whether last year’s losses could be more valuable to offset future income – when tax rates will almost certainly be higher.
• Rules for bonus depreciation. The same consideration regarding loss carryforwards applies to the rules for bonus amortization that were expanded last year by the CARES Act. They allow companies to deduct 100% of the cost of eligible assets for the first year. If a company is still in survival mode, the rules can help keep it afloat. However, the deductions will be more valuable in the future as tax rates rise.
Lowering your tax burden for the next year should certainly be a goal for both individuals and business owners, but it should never be the only consideration.
“People shouldn’t just focus on current taxes,” Zollars said. “The aim is to maximize after-tax growth and prosperity.
“You want to think about how things will affect your balance sheet after years of taxes.”