Another calendar year is coming to a close, which means another tax season approaches. Now’s the time for individuals and business owners to be talking with their tax attorneys about strategies to minimize taxes for 2021 and the years to come.
Striking the right balance between your current and future financial needs is going to be a challenge for many taxpayers this tax season. President Biden’s proposed tax increases would raise the top income tax rate from 37 percent to 39.2 percent for individuals. Corporate tax rates and capital gains tax rates would also be increased, though it’s not yet clear by how much. While nothing is certain yet, the possibility of higher tax bills starting as early as next year has a lot of individuals and business owners scrambling to make the most tax-advantaged moves for tax year 2021. Before filing your 2021 taxes, here’s what you need to know.
Preparing for Filing 2021 Taxes
While big changes may be coming, not much has significantly changed to the tax code since last tax season. Some tax benefits designed to encourage charitable giving were extended through 2021, so individuals and businesses that give to charity might save a little on taxes this way. Certain tax benefits that were enacted last year for pandemic relief have gone away this year. And if your circumstances changed during 2021, you might be eligible for different tax benefits than you have in past years; for example, some people who changed jobs because of the pandemic might be taking the home office deduction for the first time this year.
Your tax team will advise you about how any recent tax changes affect you specifically—but for many people, preparing for higher taxes in the near future is the most pressing issue right now. A lot of the conversations taxpayers are having with their advisors right now concern strategies for 2021 taxes that will (hopefully) reduce future taxes. Some of those strategies include:
- Loss harvesting. Selling investments that have lost value can be used to offset capital gains, leading to lower taxes on any gains you realized in 2021. Loss harvesting can also be deployed to lower your taxable income for the year. This is an advantageous move to make before both income tax rates and capital gains rates are raised.
- Taking capital gains now. For both individuals and business owners, taking gains in 2021 may be a useful strategy to hedge against potential tax increases in 2022. If you’re considering selling a capital asset in the near future, completing the sale in time to report it on your 2021 taxes may lead to significant tax savings compared to waiting until 2022 or beyond.
- Roth IRA conversions. If you own a traditional IRA and want to convert it to a Roth IRA for tax-free withdrawals in retirement, now might be the best time to make that conversion. You’ll have to withdraw the money from your traditional IRA first, and these withdrawals are taxed as regular income. Waiting to make this move until after your income tax rate goes up will likely cost you more in taxes.
- Gifting strategies to reduce estate taxes and income taxes. In addition to higher income and capital gains taxes, taxpayers should be thinking about a piece of pending legislation that could make many more American families liable for estate taxes. The federal estate tax exemption, currently set at $11.7 million per person. There has been some discussion that the proposed tax changes may reduce the exemption by around $6 million starting as early as January 1, 2022. As of now it appears that this proposal will not become law, but as we know, until passed by Congress and signed into law anything can happen. has not made it into the current draft bill.
- Using HSA accounts for tax-free savings. Using health and dependent care spending accounts is a way to plan for future health expenses and minimize future taxes. Money rolls over year to year, isn’t tied to employment and isn’t taxed when it’s spent on qualified medical expenses. Maintaining an HSA can be a useful tax-advantaged strategy for funding your medical needs in retirement, letting you use your other retirement accounts for other living expenses.
Which strategies make sense for your 2021 taxes? That depends largely on your specific circumstances and goals. Count on your tax advisors for specific guidance about your obligations and opportunities. One thing you can’t count on is extra time to file 2021 tax returns. The IRS extended filing deadlines in 2020 and 2021 because of the pandemic, but Tax Day 2022 is expected to return to April 15th as normal. This is just one more reason that individuals and business owners need to be proactive about tax planning and preparation this year.
The tax attorneys at Sassoon Cymrot Law, LLC advise clients on a range of individual and business tax issues. We’re here to help clients prepare for both short-term and long-term tax liabilities, creating strategies that minimize taxes and support your larger financial goals. To get the help you need for 2021 tax season and beyond, contact us today.
Scott Wittlin is a business and tax attorney with significant experience in advising businesses and the business owner. Scott works with business owners in addressing the complicated tax decisions they face in both their succession and estate planning. He works with his clients to maximize their tax benefits in all facets of their business and personal lives. He also assists families with probate and estate administration.
Steven Meyer has dealt with both federal and state tax matters; including representing Taxpayers representation before administrative. His almost fifty years of experience includes international tax and a specialty in estate and asset protection for clients with cross-border concerns. Steve’s clients include businesses and individuals with various tax planning needs such as estate planning, IRS and state taxing authority’s administration, probate of estate and non-profits.