As another autumn pulls the pages off the 2021 calendar, it’s already time to start planning for the end of the year. The days get shorter but often busier as the weather cools down. This can be a vital time when preparing for taxes, and it’s good to know what the best savings strategies are for you to implement now, which will put you in a good spot for your 2021 taxes. Between understanding which deductions are best for you and how to lower your tax burden, it’s not too late or too early to implement these twelve methods to save big on your taxes next year.
1. Max out 401(k) and 457 plans. For a simple way to lower taxable income, take advantage of employer-sponsored plans, such as 401(k) and 457 plans. Make sure you contribute the maximum amount; for a 401(k) plan, an employee can contribute up to $19,500 annually, with an additional $6500 if you’re over age 50. The deadline for these contributions to count toward this year’s taxes is 12/31, so make sure you make your deferral by that time.
2. Adopt a 401(k) profit-sharing plan. While it may seem late in the year to set up a 401(k) plan for your small business, the SECURE Act extended the deadline for businesses so that they have until the corporate tax deadline rather than the end of the year. By adopting a 401(k) Profit Sharing Plan, a self-employed business owner can contribute up to $58,000 into the plan, all of which is tax-deductible. This can help balance out the extra income.
3. Establish a cash balance plan. This plan is a type of defined benefit plan that can aid physicians who wish to save a larger amount of retirement assets in a relatively short amount of time. Contributions to the plan qualify for tax deductions, and someone at the 60 can contribute north of $200,000 in the cash balance plan, and the funds are completely tax-deductible.
4. Bonus depreciation for vehicles. The Tax Cuts and Jobs Act (TCJA) recently passed bonus depreciation for vehicles weighing over 6000 lbs. Using a bonus depreciation, you can write off almost 100 percent of the car’s purchase price if it’s used solely for business purposes.
5. Pay state tax from entity (PTE): 19 states have adopted pass though entity tax (PTE) law so far this year. Using entities such as S Corp, you can choose to pay state income tax from the entity and get the deduction. Keep in mind TCJA capped the state and local tax (SALT) to only $10,000. Physicians should reach out to their CPAs if their states allow PTE Tax selection.
6. Claim QBI for personal income: A very useful tax write off; the qualified business income deduction is available for those self-employed individuals and small business owners who are eligible; it allows them to deduct up to 20 percent of their qualified business income on their taxes; subject to income limit.
7. Don’t forget QBI for real estate income. As part of the Tax Cuts and Jobs Act, certain properties may also be eligible for the 20 percent QBI deduction if certain criteria are met. Individuals or entities must consider each property for rent as an enterprise or consider all similar properties as a single enterprise together. It’s important to ensure all requirements are met when utilizing this deduction.
8. Open an HSA account. Health savings accounts, or HSAs, can be more than just savings for health-related expenses. There are several ways they can help with tax savings as well. Firstly, contributions are made to the HSA pre-tax, so there are no taxes required at the time they are contributed. For a family, a physician can contribute about $8,100 for 2021.
9. Harvest tax loss. For those who find themselves with gains realized throughout the year, which would lead to high taxable dividends, tax loss harvesting is a strategy that can be used to offset that situation. Tax-loss harvesting is the process of selling some investments, often those which are more short-term, at a loss to balance out the gains.
10. Contribute to your child’s 529 plan: While 529 plan contributions are not deductible for federal taxes, some states do consider these contributions tax-deductible. This may be one of the important considerations when choosing the best 529 plan for your child. Later withdrawals are not subject to federal or state taxes when taken to help with education expenses.
11. Convert using a back door Roth IRA: Individuals whose income level is too high to allow them to open a Roth IRA may find a backdoor Roth IRA to be a method to gain the same tax benefits through converting a traditional IRA to a Roth IRA.
12. Make charitable donations: Charitable donations may be the right choice for those looking to give back while still gaining tax benefits. After setting up a charitable trust, the donor may deduct up to 60 percent of cash adjusted gross income or 30 percent if appreciated assets, such as stocks, are held in the trust. If you’re looking to gain a deduction this year, the deadline for contributing cash or other assets into the trust is the end of the tax year.
While these are a good sampling of 2021 tax savings strategies, others definitely may suit your situation better. Often, it’s not one method but a carefully applied holistic plan that considers the whole picture to put you and your family in the best position for the end of 2021 and the coming of 2022. We encourage speaking with a fiduciary financial advisor who will put your best interests at the forefront of planning and set you up for success now and in the future.
Securities are offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies. You should continue to rely on confirmations and statements received from the custodian(s) of your assets. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation.
Syed Nishat is a partner, Wall Street Alliance Group. He can be reached on LinkedIn and on Twitter @syedmnishat. He holds the FINRA Series 7, FINRA Series 63, and FINRA Series 66 licenses, along with licenses for life, disability, and long-term care insurance.
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