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Top Individual and Business Tax Planning Strategies

Over the weekend, Democratic Sen. Joe Manchin of West Virginia said no to the Build Better Act, ending negotiations on this version of the legislation. Manchin withheld support requesting Democrats to pare down several provisions of the estimated $1.9 trillion package. This likely means Build back Better is dead for 2021. Whether we’ll see another effort to revise and pass in 2022 is anyone’s guess.
Now is the time to reflect on 2021 and take steps to minimize your liability and make certain you’re set for the upcoming filing season
TOP 11 INDIVIDUAL STRATEGIES
11- Review your stock portfolio
Have you sold any equities for a gain or do you expect capital gain distributions from mutual funds? If so, you may consider tax-loss harvesting. Sell some or all of those losers in your portfolio and take advantage of the offsetting capital loss. For Federal, an excess loss of $3,000 can be deducted with the remainder carried forward. Alabama has no such limitation. If you wish to repurchase the securities sold wait at least 31 days to avoid the “wash sale rules”.
10- Max Out 401K
Also, consider adjusting your 401(k) plan deferral contributions to ensure you reach the maximum statutory limit for the year, that limit is $19,500 for those under 50 and $26,000 for anyone over 50 by year-end.
9- Review Withholding and Estimates
Make certain you have sufficient tax payments to avoid penalties. Failure to withhold sufficient tax, or pay timely quarterly estimates, may cause you to owe tax with your return and may result in penalties and interest.
8- Required Minimum Distributions are back
RMDs are required in the year a taxpayer turns age 72. If no RMD was taken for 2020, make certain you consider the 2021 RMD when planning. To forgo the taxable income, consider the qualified charitable distribution mentioned below.
7- Qualified Charitable Distribution
Up to $100,000 may be distributed directly from an IRA to a qualified charity. The qualified charitable deduction is excluded from income.
6- Limits on Charitable Contributions
For 2021, the annual limit for cash contribution is 100% of the taxpayer’s AGI. That’s correct, your entire liability could be eliminated. Please note this is for cash contributions only. Deductions of appreciated property held long term (over 1yr) are limited. For example, deductions of appreciated securities are limited to 30% of adjusted gross income. Any excess contribution is carried forward 5 years. Using appreciated securities for donations is a smart move – you get a deduction or the full market value at the time of the gift and never pay tax on the appreciation.
5- Noncash Charitable Contributions
If you plan on cleaning out closets and donating unused items, do before December 31st and pick up the deduction for 2021.
4- Consider Donor Advised Funds
Tired of the record-keeping related to your yearly charitable contributions? Donor-advised funds (DAF) may be the way to go. DAFs allow for easy record keeping all in one spot. One item of note, for 2021, DAFs qualify for the 60% AGI limitation (similar to cash) and not the 100% AGI limitation discussed above.
3- Estate and Gift Tax Considerations
The 2021 annual gift tax exclusion is $15,000 ($30,000 for married couples) and $16,000 ($32,000) for 2022. The 2021 gift and estate basic exclusion amount is $11.7 million in 2021 and $12.06 million in 2022; these are also the amounts for the generation-skipping transfer tax exemption. Now is a good time to revisit your documents and estate plan.
2- Bunching Itemized Deductions
Bunching allows you to group as many tax-deductible expenses as possible into a single year. This would result in you itemizing in one year and taking the standard deduction the following year, and then alternate years moving forward. For example, instead of contributing $50k to charity annually every year for 5 years you may consider frontloading and donating all $150k using a donor-advised fund – in this scenario, frontloading results in $56k of additional deductions over 5 years.
1- Max Out Alabama 529 plan Deduction
Alabama taxpayers can deduct up to $10,000 per couple married filing jointly ($5,000 single). At 5% Alabama tax rate results in a $500 savings on Alabama taxes.
TOP 6 BUSINESS STRATEGIES
6- Employee Retention Credits
Recheck and make certain you have applied for all applicable employee retention credits. For 2020, the available credits were $5,000 per worker per quarter and $7,000 per worker per quarter for 2021. Wages paid after September 30th are not eligible.
5- Depreciation (Bonus and 179)
Most business owners are aware of the rules but worth mentioning. Most if not all assets purchased are eligible for expensing. For 2021, the issue seems to be finding a truck or piece of equipment to buy!
4- Meals
For 2021 and 2022, foods and beverages purchased at a restaurant qualify for a 100% deduction. This was previously 50%.
3- Alabama Pass Through Entity Tax (PTE)
HB588 was signed into law in May this year. Eligible pass-through entities can pay Alabama income tax at the entity level and minimize the consequences of the $10,000 Salt. The savings can be significant – see our August post for more details: Pass Through Entities Blog Post
2- Stock Up
Supplies are generally deductible when purchased. Now maybe the time to stock up – especially if you anticipate shortages.
1- Qualified Business Income Deduction (QBI)
If applicable revisit the deduction and make certain you are capturing the maximum benefit.
Please contact your Dent Moses advisor or our office with questions or for more information.