2021 Year-End Tax Planning Opportunities for Individuals & Businesses

2021 has brought another year of changes in tax legislation. We have seen additional COVID-19 relief efforts tied to the tax code, passing of the $1T infrastructure bill (Infrastructure Investment and Jobs Act), and we now have a budget reconciliation bill under consideration (Build Back Better Act) that could bring significant tax law changes. With these changes, now is the time to consider year-end tax planning opportunities. If you would like to implement any of the opportunities listed, or if you would like to discuss how these opportunities apply to your specific situation, please do not hesitate to contact our team or schedule a tax planning appointment by clicking the following link: www.calendly.com/ongandcompany 

INDIVIDUAL YEAR-END TAX PLANNING OPPORTUNITIES

• Consider the impact of the major provisions included in the proposed budget reconciliation bill (Build Back Better Act) and monitor for the final version prior to year-end. The updated draft legislation would include the following major individual income tax changes (effective January 1, 2022 unless otherwise noted):
  • Raise the cap on the state and local tax (SALT) deduction from $10,000 to $80,000 and extend this cap through 2030. The $80,000 SALT cap amount would also apply to the 2021 tax year. 
    • Planning Opportunity: Consider prepayment of state taxes prior to December 31st to allow for deduction on your 2021 tax return if this provision is included in the final version of the bill. 
  • Create a new surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense, equal to 5% on MAGI in excess of $10M plus 3% on MAGI above $25M.
    
    • Planning Opportunity: Consider options to spread income over multiple years if a taxable event will cause your income to exceed these thresholds. 
  • Limit Individual Retirement Account (IRA) contributions when balances reach $10M and accelerate required minimum distributions for those accounts. 
    • Planning Opportunity: Consider options to spread income over multiple years if a taxable event will cause your income to exceed these thresholds. 
  • Increase the Electric Vehicle (EV) tax credit to a potential $12,500, up from the current $7,500,  for qualifying cars and buyers. 
    • Planning Opportunity: Consider delaying the purchase of an EV to 2022 if the vehicle would meet the requirements for the increased credit and if you would meet the proposed income eligibility limits ($250,000 for single filers, $500,000 for married filing joint filers). 
  • Extend the American Rescue Plan Act (ARPA) Child Tax Credit (CTC) expansion through 2022, and make the entire CTC fully refundable on a permanent basis. 
  • Extend the ARPA’s temporary expansion of the Earned Income Tax Credit (EITC) eligibility, phase-in rates, and amount through 2022. 
• Consider your 2021 economic stimulus payment (3rd round) and the impact of your 2021 income on your Recovery Rebate credit. 
  • The American Rescue Plan Act of 2021 directed the IRS to issue a 3rd round of economic stimulus payments of up to $1,400 per taxpayer and $1,400 per qualified child dependent earlier this year. The payments were paid based on 2019 or 2020 return information, but are actually structured as advances of 2021 tax credits. Eligibility for the 3rd stimulus payment / recovery rebate credit phases out at income of $75,000 for single filers, $150,000 for married filing joint filers, and $112,500 for head of household filers. If the 2021 credit calculation is less than you received, there is no impact as you will not be required pay back the payment you received. If you received less than the credit calculated for 2021 due to a reduction in income versus your base period used (2019 or 2020), you can claim the credit as an additional refund or offset to taxes due with your 2021 tax return. If you did not receive an economic stimulus payment during the year, or you received a reduced payment due to your income level on previous year returns, you should consider planning your 2021 income to allow yourself to be eligible for the Recovery Rebate credit.
• Consider converting all or a portion of your traditional IRA to Roth.
  • With tax rates at historically low levels, many taxpayers have the opportunity to lock in low federal tax rates in pre-tax retirement assets by executing a Roth conversion prior to December 31st. The favorable brackets to stay within while executing this conversion are the 12% bracket (taxable income up to $81,050 for married filing jointly taxpayers) and 24% bracket (taxable income up to $329,850 for married filing jointly taxpayers). Make sure you project your overall tax impact prior to executing the conversion as it could impact your premium tax credit, portion of social security income subject to tax, and/or Medicare IRMAA (if applicable).
• Consider estimated tax payments to eliminate or minimize underpayment penalties. 
  • Similar to 2020, many individuals received unemployment compensation in 2021. Unemployment compensation is subject to income tax, and many taxpayers will be hit with a surprise tax bill if taxes have not been withheld from payments received. Be sure to project your taxes due, and consider making estimated tax payments (the next estimated tax payment due date is 1/15/2022) to eliminate or reduce a potential underpayment penalty if you have not met the federal requirement of paying in the lower of 90% of your current year tax or 100% (or 110% at higher income levels) of prior year (2020) tax.
• Review city tax withholding and prepare documentation for refunds if you lived and worked outside of the city in 2021. 
  • Certain cities (e.g. Kansas City, MO) have their own income tax that they collect from people who live or work within the city. For example, if you live or work in Kansas City, MO, you are required to pay a 1% tax on all income earned while either living or working in the city. Employers based in the city will withhold this tax from employee paychecks and remit the payments to the city on your behalf. If you do not live in the city, you are only required to pay this tax on income generated while working in the city. For many in 2021, employers have continued to withhold this tax for these employees while the employees have been working from home (outside of the city). If this situation applies to you, you can request a refund with your 2021 city income tax filings (Form RD-109 Earnings Tax Return for Kansas City, MO). As part of the return, you will need to include a nonresident schedule that includes your total days worked everywhere, actual days worked outside of the city, employer's name, employer's email address, employer's contact person, contact person's phone number, address of your primary work location, and a description of the records you maintained to support your calculation for days worked outside of the city. This can be a significant potential refund with many individuals working from home in 2021. If this situation applies to you, be sure to collect, organize, and prepare your records to claim the refund as part of your 2021 tax filings. 
• Consider the December 31st deadline for employee retirement plan contributions, charitable contributions, and 529 contributions. 
  • Remember that December 31st is the deadline for employee contributions to 401(k) and Simple IRAs, and it is also the deadline for charitable contributions and 529 contributions. Note that the TCJA expanded the use of 529 funds to include paying for K-12 private school tuition, up to $10,000 per year per student. If your children are attending private schools, consider maximizing your contributions to 529 accounts to receive a deduction on your state tax return. In addition, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December 2019 allows families to take tax-free 529 plan distributions for student loan repayment of up to a lifetime limit of $10,000 per beneficiary. If you are phased out of the student loan interest deduction due to your income level, consider making a contribution to a 529 account to pay off student loan debt and receive a deduction on your state tax return. 

BUSINESS YEAR-END TAX PLANNING OPPORTUNITIES

• Consider the impact of the major provisions included in the proposed budget reconciliation bill (Build Back Better Act) and monitor for the final version prior to year-end. The updated draft legislation would include the following major business income tax changes (effective January 1, 2022 unless otherwise noted):
  • Expand the base of the 3.8% Net Investment Income Tax (NIIT) to apply to active business income for pass-through firms. This would apply to single filers with income over $400,000 and married filing joint filers with income over $500,000.
    • Planning Opportunity: Consider accelerating business income to 2021 to avoid the additional 3.8% tax on business income in future years. Consider other options to minimize business income subject to the 3.8% NIIT by optimizing pretax deferrals and spreading income over multiple years. 
  • Delay the requirement to amortize research and development (R&D) expenses over five years, instead of taking immediate deductions, to begin after 2025 instead of after 2021. 
  • Create a program to provide paid leave for private sector workers, to take effect in January 2024. The plan would provide 4 weeks, or 20 days, of paid leave for reasons generally provided under the current Family and Medical Leave Act to bond with a newborn or a newly placed child, or to provide care to oneself or to a family member due to a serious health condition. The maximum benefit would be set at ~$800 per week, to be calculated as follows: 90% pay for those earning less than $290 per week, 73% for those earning less than $620 per week and 53% for those earning less than $1,192 per week.  
  • Make permanent the active pass-through loss limitation enacted in the 2017 Tax Cuts and Jobs Act (TCJA).
  • Impose a 15% minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022. 
  • Create a 1% excise tax on the value of stock repurchases during the taxable year, net of new issuances of stock, effective for repurchases after December 31, 2021. Excluded from the tax are stock contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs). 
• Take advantage of full expensing of fixed asset purchases, including qualified improvement property (QIP).
  • The 2017 Tax Cuts and Jobs Act (TCJA) temporarily allows 100% expensing for business machinery, equipment, furniture, and fixtures acquired and placed in service after September 27, 2017 and before January 1, 2023. The 100% allowance decreases by 20% per year in taxable years beginning after 2022 and expires January 1, 2027. In addition, The 2020 CARES Act included a correction to the TCJA that allows businesses to fully deduct costs associated with improvements made to the interior of a building (qualified improvement property). Previously, those costs were required to be depreciated equally over a 39-year lifespan. Full expensing in the year placed into service, rather than depreciating over a 39-year period, can have a significant impact on the tax situation of the owners of the business (for passthroughs) or for corporations. Options for full expensing of capital expenses, vehicles, and improvements should be considered as a planning option to optimize taxable income for 2021 and 2022. 
• Consider the impact of Employee Retention Credits on 2021 taxable income.
  • While the Paycheck Protection Program (PPP) received the majority of attention, the Employee Retention Credit (ERC) provided businesses with significant relief in the form of payroll tax refunds for eligible quarters in both 2020 and 2021. While PPP forgiveness is excluded from taxable income, the same cannot be said for ERC benefits. The credit amounts received increase taxable income, which can lead to significant taxable income increases for many. The impact of these credits received or applied in 2021 must be considered when planning Q4 estimated tax payments and cash flow needs for Q1 of 2022 when income tax payments are due. If your business has not investigated the ERC to determine eligibility and potential benefits, I recommend contacting our firm to begin the process.
• Deduct and/or issue reimbursements for home office expenses.
  • The COVID-19 pandemic has continued to force workers to spend a significant amount of time working from home in 2021. Self-employed individuals should track all direct and indirect home office expenses incurred in 2021 and be sure to compare the simplified method ($5 per square foot) versus the actual expenses method (actual expenses multiplied by business use percentage). 
  • While self-employed individuals can apply a home office deduction on their individual tax returns, employees cannot (including S-Corporation owner employees). Employers should issue reimbursements for home office expenses to allow the company to deduct the business use of home expenses. Documentation of the calculation for this reimbursement should be retained in the form of an expense report. Contact our team if you would like assistance with the calculation of a home office reimbursement expense or if you would like an expense report template to be completed and retained with company documents. 
• Issue reimbursements for health (including Medicare), vision, and dental insurance premiums paid personally by S-Corporation owners. 
  • Greater than 2% owners of S-Corporations can deduct premiums paid for health, dental, and vision insurance as self-employed health insurance. To do so, the company must pay for the premiums directly or reimburse owners for the amount of premiums paid by December 31st. The total amount of premiums deducted for each owner must then be reported in Box 1 of their W-2's to allow for proper reporting of the deduction. Self-employed health insurance can be a significant deduction, so be sure to issue reimbursements if premiums have been paid through personal accounts in 2021. 

If you have any questions about the opportunities listed above, or if you would like to schedule an appointment to run a tax projection to understand the impact of potential changes on your situation, please do not hesitate to contact our team. Appointments can be scheduled online by visiting our homepage at www.ongandcompany.com.