With year’s end approaching, it’s time for tax planning and preparation. Before you begin to prep for this critical time, keep in mind that there have been some changes that might impact your tax situation. To soften the tax load and come out on top this tax season and beyond in 2022, take a look at the following tax-planning moves you can implement now.
Income tax withholdings
To avoid any big surprises in 2022, double-check to ensure that the right amount of taxes are being withheld from your pay. This can be a challenging task for those who recently became self-employed since they can pay on a quarterly basis.
Luckily, the IRS has a useful tax withholding calculator to figure things out. So, leave the guesswork out of this year’s taxes and double-check that you have been deducting the correct amount.
Check eligibility for Qualified Business Interest deductions
As a small business owner, there’s a possibility you can take advantage of the Qualified Business Interest deduction, a 20% deduction on net income.
Businesses that operate as a pass-through entity qualify if their income is more than $164,000 for individuals and $329,000 for joint filers.
For businesses that are on the fringes of qualifying, a careful analysis of their situation can get them over this tax threshold for even bigger savings through the 199A tax deduction. Think about contributions to a Solo 401(k) or Cash Balance Plan to get there. With proper planning, California business owners in higher tax brackets can save a substantial amount over the next decade.
Give back through charitable deeds
Businesses can receive a nice tax break by giving back.
While a tax benefit isn’t the main reason for your charity, keep in mind that bundling gifts that span several years and including them in this year’s tax may move you over the threshold to itemize deductions.
If this is a strategy you want to employ, you might want to look into a donor-advised fund, which allows you to make contributions, receive the tax benefit, but hold off on paying the charities until a later time. This also frees up funds for investment, which can grow tax free.
Did you check how your nonretirement investments are performing? If not, now’s the time to do so.
The goal is to evaluate the hot and cold performers and sell accordingly if it makes sense to your overall tax position. For instance, it’s possible to offset thousands of dollars in income through short-term losses. Also remember that unused short-term losses can be applied at a later time.
This strategy isn’t always a homerun given where things are at with the stock market, but it’s worth a look.
2021 retirement contributions deadlines
Don’t forget to check on the deadlines for your retirement contributions, as they vary based on plans and how you contribute.
For the 2021 tax year, some accounts, such as Roth IRA, can be funded through next April. Unfortunately, there will be a limit of $6,000. You also have until next April to open up an account. For self-employed individuals, make sure to check the SEP-IPA or Solo 401(k) plans, which can have later deadlines and larger contribution limits.
Standard deduction or itemize?
Over the last several years, fewer taxpayers are opting for Schedule A to itemize their tax deductions. And with the Tax Cuts and Jobs Act, it can make more sense to file using the standard deduction on personal income taxes.
The State and Local Tax Cap is $10,000, which can be a difficult tax pill to swallow, especially if you’re paying a lot in state tax or live in an area where real estate valuation continually increases. To make matters worse, the $10,000 cap is the same for single or joint filers.
So keep in mind that for 2021, the base standard deduction for single and joint filer is $12,550 and $25,100, respectively.
Simply put: Using the standard deduction will be easier and save you time.
If you need any help preparing for tax season, don’t hesitate to contact us!