As we head into the home stretch of 2021, you might already have your sights set on 2022. Hopefully, the pandemic will finally get under control and things can return to normal.
This is actually the perfect time to think about taxes. You have a small window to impact the amount of money you’ll owe or get back in 2022.
Maximize those opportunities, and you’ll be in for a pleasant surprise. End of year tax planning is the smartest thing you can do.
What are the best end of year tax moves to make right now? Keep reading to find out.
1. Retirement Contributions
The deadline for making 401(k) and 403(b) contributions is December 31. However, you have until April 18, 2022, to contribute to an IRA account.
The IRS lets you contribute up to $19,500 into your 401(k) account. You may be able to receive a tax deduction on your contributions if you make pre-tax contributions. Remember that while you enjoy the deductions now, you’ll pay taxes when you withdraw the funds.
You might also qualify for a Saver’s Credit depending on your income and the amount you saved.
A Roth IRA and Roth 401(k) are examples of retirement funds that are paid with after-tax contributions. If you expect to pay more in taxes when you retire, these accounts make sense because you’ll withdraw your funds tax-free.
2. Check Your Tax Withholdings
Employees have their federal and state taxes withheld by their employers. The amount the employer withholds is according to your W-4 form and income earned.
You might take a lot of allowances on the W-4 to minimize your tax contributions. That can bite you later on because you owe a lot of money in taxes in April.
You can use a tax calculator to check your tax withholdings. If you find that you underpaid taxes, you can prepare now by setting money aside. You can also tell your HR department to adjust your withholdings.
3. Visit Your Accountant
Did you have major life changes over the last year? Maybe you started a business or had a child. There are usually tax consequences when a major life change happens.
Pay a visit to your accountant and go over your situation with them. They can come up with tax strategies to help you minimize the damage and increase your return.
4. Review Your Business
Does your business structure give you the most benefit? Most small business owners are sole proprietors, but they also tend to pay the most taxes thanks to the self-employment tax.
It might be time to become an LLC that files as an S-Corporation. This limits the amount of self-employment taxes you pay.
If your business is growing at a fast pace or you brought on a partner, it is time to review the business structure.
It would also behoove you to visit an accountant or service such as Suretax to review your business structure and make the most out of every expense.
5. Make Charitable Contributions
This is a massive fundraising period for nonprofit organizations. They know that people are looking to get the most tax benefits of donations, so they’ll send out their appeal letters and emails.
That changed with the Tax Cuts and Jobs Act of 2017. Since the standard deduction was doubled, most taxpayers wouldn’t get the tax benefits.
That changed in 2020. The CARES Act allowed above-the-line deductions for charitable donations in 2020 and 2021.
This means that you don’t have to itemize deductions to get the benefits, but there is a cap on how much you can deduct. Single taxpayers can deduct up to $300, while those filing jointly can deduct up to $600.
Taxpayers over 70.5 years old can make a direct donation from an IRA account. That allows you to withdraw the funds tax-free and take the deduction.
6. Home Office Deduction
Work from home exploded in 2020 and workers are continuing to demand work from home options in 2021. There are also millions of freelancers and self-employed people who work from home.
There’s still a question about working from home and the home office deduction, especially for employees.
Self-employed workers can take the home office deduction as long as they use a space in their home exclusively for business purposes.
Employees used to take a home office deduction, but that was put on hold between 2018 and 2025 thanks to the Tax Cuts and Jobs Act. Employees might be able to claim a home office deduction on state taxes.
7. Always Keep Good Records
Good recordkeeping is necessary for all taxpayers. You never know when the IRS or other tax agency will send you a letter about your tax returns.
Mistakes happen when your tax return gets processed. You could get a letter saying that you didn’t pay estimated taxes when you really did.
It’s possible to get a notification that you’re getting audited or the IRS might need more information about your tax deductions.
The more information you can provide, the better. Keep paper and/or digital copies of your records, especially anything that involves deductions.
Organize them so they’re easy to find. Keep them for several years after you file taxes.
End of Year Tax Planning Made Easy
The 2021 tax filing season is a lot closer than you realize. Fortunately, there is still enough time on the clock to make end of year tax planning happen.
Don’t wait to reduce your taxes. Make the smart tax moves today. Talk to an accountant, maximize your deductible contributions, and always keep records of everything.
Do you want to know how you can start tax planning for the 2022 tax year? Check out the home page of this site for the latest economic and business news today.