As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. This year’s planning is more challenging than usual due to the uncertainty surrounding pending legislation that could, among other things, increase top rates on both ordinary income and capital gains.
Whether or not tax increases become effective this year or next, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.
However, if proposed tax increases do pass, the highest income taxpayers may find that the opposite strategies produce better results: Pulling income into 2021 to be taxed at currently lower rates, and deferring deductible expenses until 2022, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all the relevant factors.
We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet or correspond to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
TAX PLANNING IN A LOW INCOME YEAR
As always, it is generally important that you fully utilize deductions and consider using the lower 10 and 12 percent tax brackets if you are to maximize your tax planning strategies. For 2021, these lower tax brackets apply to $81,050 of taxable income for a married couple filing jointly and $40,525 of taxable income for singles. If your income is below those amounts and anticipated to rise next year, it may be advantageous to accelerate income and defer deductions for 2021.
For Oregon residents, if your estate (combined with your spouse, if applicable) will be worth more than $1 million (the State of Oregon limit) when you die (including any life insurance your estate may receive), then you probably need to consider advanced estate and gift tax planning. There are many ways to reduce estate taxes. For Federal purposes, each individual can currently transfer up to $11,700,000 in their lifetime without incurring estate or gift tax, in addition to the annual gift tax exclusion of up to $15,000 per person for 2021.
If your will has not been updated recently, a review may be worthwhile. Even with an estate valued at less than $1 million, there are many family circumstances or philanthropic wishes that make an update a good idea.
YEAR END TAX PLANNING TIPS
The following is designed to highlight some tips that might be implemented to minimize your tax burden, either this year or in total over the next few years.
1) Where possible, manage the timing of your income and deductions to your advantage:
a. Prepay deductible expenses or delay income if you are in the higher tax brackets. In most cases, you can use credit cards or credit lines to prepay deductible expenses.
b. Accelerate income into 2021 or delay paying deductible expenses until 2022 if you have no or low income in 2021 and expect higher income next year.
2) Consider selling stocks or other investments such as real estate or virtual currency with gains or losses to increase or decrease your income as appropriate. Long-term capital gain from sales of assets held for over one year is taxed at Federal rates of 0%, 15% or 20%, depending on the taxpayer’s taxable income. Oregon taxes capital gains at standard rates as Oregon does not have separate capital gain rates. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% Federal rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,800 for a married couple; estimated to be $83,350 in 2022). If, say, $5,000 of long-term capital gains you took earlier this year qualifies for the zero rate then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free. The Federal long-term capital gain rate is 15% if your modified adjusted gross income is $501,600 or less for married couples filing jointly or $445,850 or less for a single individual. This also applies to qualified corporate dividends.
3) Analyze your passive losses (including prior year carry forwards) to see if they are being limited and what steps can be taken to increase their use.
4) If you are receiving Social Security payments, be sure your year-end planning takes into account how it affects the taxability or possible repayment of your Social Security benefits.
5) Maximize your retirement plan contributions:
a. If your employer offers a qualified plan (401(k), SIMPLE IRA, SEP, etc.) consider increasing your contributions in the 4th quarter to take advantage of as much of the deferral contribution limit as possible.
b. Make an IRA contribution (up to $6,000 in 2021; $7,000 if age 50 or older) particularly if it is deductible and lowers your taxes, or a Roth IRA contribution if you are in a low tax bracket. This can be done until April 15, 2022. Please contact our office for help in determining how much to contribute and which type of IRA benefits you most. Please note there are limitations based on AGI thresholds.
6) Consider converting your existing IRA to a Roth IRA. There is not an income limitation on conversions; however, the conversion is no longer reversible.
7) If you are eligible to make a Health Savings Account (HSA) contribution, you have until April 15, 2022 to make a 2021 contribution. If you become eligible late this year, you can make a full year’s worth of contributions even if you were not eligible for the entire year. Contributions to an HSA are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses. If you make mid-year changes to a qualifying plan due to enrolling in Medicare, coverage changes due to a new employer, or employer’s benefits renew mid-year, you may need to pro-rate your HSA contribution limit.
8) Determine if your medical expenses have exceeded 7.5% of your adjusted gross income. If they have and you are itemizing, pay all outstanding medical bills by the end of the year to maximize the deduction. Even if you take the standard deduction on your federal income tax return, you may itemize on your state income tax return.
9) Charitable Contributions:
a. Acquire written receipts for ALL charitable contributions.
b. Keep detailed records of non-cash contributions. List the property, condition, and fair market (thrift shop) value. Attach a detailed list to the receipt you receive. Also, if the non-cash donation is valued over $5,000, you must have a qualified appraiser sign IRS Form 8283.
c. Contribute appreciated stock to your favorite charity or to a donor-advised fund. You get a deduction for the fair market value of the stock, but pay no tax on the capital gain subject to certain limitations. You can also contribute appreciated stock to Oregon IDA and receive a 90% Oregon credit and deduct the remaining 10% as a charitable contribution. Get more information at oregonidainitiative.org.
d. For 2021, you can deduct qualifying charitable contributions up to 100% of your AGI.
e. Taxpayers age 70 ½ or older can make a qualified charitable distribution up to $100,000 per year from their IRAs.
f. Before December 31, 2021, take advantage of the Oregon Cultural Tax Credit by contributing any amount to a qualifying Oregon nonprofit cultural organization AND contributing a similar amount to the Oregon Cultural Trust. Then take a 100% dollar –for-dollar tax credit against your Oregon tax liability equal to your Oregon Cultural Trust contribution (up to the maximum limits of $500 for individuals, $1,000 for couple filing jointly, or $2,500 for Oregon corporations). See their website www.culturaltrust.org or call us for more information.
g. Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers) for cash contributions to qualified organizations.
10) Remember to complete this year’s annual gifts (up to $15,000 per person for 2021) free of taxes by December 31, 2021 if you need to reduce potential estate taxes.
11) Assess the adequacy of your 2021 income tax withholdings to determine if an increase is needed to avoid any underestimated tax penalties.
12) Required minimum distributions (RMDs) from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have not been waived for 2021, as they were for 2020. If you were 72 or older in 2020 you must take an RMD during 2021. The penalty is 50% for any 2021 RMD not distributed by 12/31/21. Those who turn 72 this year have until April 1 of 2022 to take their first RMD but may want to take it by the end of 2021 to avoid having to double up on RMDs next year.
13) For Oregon residents saving for college, the rules have changed regarding the Oregon 529 plan. Oregon now offers a tax credit-$150 for single filers, $300 for joint filers. There are some carryover provisions for allowing deductions from prior year contributions. Please speak to your accountant regarding this.
1) Increase (or start) your retirement plan contributions. Remember certain qualified plans (e.g. single member profit sharing, 401(k), etc.) if desired for 2021, must be set up by December 31, 2021. However, SIMPLE IRAs and 401(k)s with multiple participants need to be set up before September 30 in the initial year for deductible contributions. Contributions can be made as late as the extended due date of your tax return. SEP plans can be set up and funded as late as the extended due date of the tax return. For 2021, the maximum contribution rate is generally 25% of earned income (a contribution maximum of $58,000 or $64,500 if 50 years or older, for most defined contribution plans). Also, there is a tax credit for up to $5,000 per year for 3 years ($15,000 total) on new, improved retirement plan startup costs.
2) Consider paying your children wages if they are working in your business and are in lower tax brackets. This probably will not be as beneficial for a partnership or a corporation and also will not be as effective if your children are over age 18 since Social Security taxes would have to be withheld and matched. It may, however, provide early retirement savings opportunities for your child. Worker’s compensation coverage may be required if you employ your children.
3) Purchase needed equipment and furniture (new or used) and place in service by December 31, 2021 in order to potentially qualify for up to $1,050,000 of IRC §179 depreciation expense, or the now 100% bonus depreciation (which is very similar to IRC §179 expensing). Remember that there are special rules that may limit depreciation on certain vehicles.
4) Consider paying a bonus out of your corporation to address reasonable compensation issues and withholding needs or to maximize a potential Section 199A (Qualified Business Income) deduction.
5) Consider tax benefits of incorporating certain limited liability structures if you are a sole proprietor or partnership.
6) Consider increasing your basis in your partnership or S-corporation to make possible a 2021 loss deduction (if your losses are being limited by basis or the “at-risk” rules).
7) Consider using a credit card (in Business Name) to pay deductible expenses before the end of the year. Doing so will increase your 2021 deductions even if you don’t pay your credit card bill until after the end of the year.
OREGON CORPORATE ACTIVITY TAX
Signed by Oregon’s governor on May 16, 2019, H.B. 3427 imposes a corporate activity tax (CAT) applicable to tax years beginning on or after January 1, 2020. The CAT is imposed in addition to the state’s current corporation excise and income tax.
The tax applies to corporations, individuals, partnerships, limited liability companies, federally disregarded entities, and ‘any other entities.’ Unitary groups register, file, and pay the tax as a single taxpayer. You must register within 30 days of reaching $750,000 of Oregon sourced gross revenue. The CAT is equal to 0.57 percent of a taxpayer’s Oregon-sourced ‘taxable commercial activity’ in excess of $1 million for the calendar year, plus $250. Thus, it is essentially a gross receipts tax; however, a deduction of up to 35% for labor or cost of goods sold is allowable.
Reporting requirements-Due January 31, 2022:
Please keep in mind that we would be glad to prepare any or all of these forms and/or reports for you or help with the preparation.
a. Form 1099-NEC must be sent by January 31, 2022 to anyone (other than corporations) who provided personal services to you totaling $600 or more in 2021. This includes consultants, attorneys, accountants, painters, janitors, etc. Also, a Form 1099-MISC must be sent for all rents paid. Since there is up to a $100 penalty for each Form 1099 not sent, our philosophy is: if in doubt, send one. A Form 1099 must be sent to attorneys even if they are incorporated. Doctors who are incorporated and who you have paid over $600 also get Form 1099 if the money you paid them is a business deduction. The information must also be filed with Federal and Oregon agencies by January 31, 2022. Oregon now requires ALL 1099 forms to be electronically filed.
b. Form 1099-INT needs to be sent to anyone (other than corporations) who was paid more than $10 of interest in 2021 if the interest is a business deduction. This includes interest paid to owners or other related non-corporate business entities.
c. Form W-2 must be given to employees by January 31, 2022. The info must also be submitted to the Social Security Administration AND to the State of Oregon by January 31, 2022.
d. Oregon Form WR needs to be filed by all businesses with an Oregon Business Identification Number (BIN) by January 31, 2022. If you are using a payroll service, this form will be filed on your behalf.
Remember that wages reported must be adjusted for:
*Health insurance paid for S-corporation shareholders who own at least 2%
of company stock
*Life Insurance provided in excess of $50,000 in coverage
*Personal use of company vehicles
If you need assistance calculating the correct inclusion amounts for life insurance or personal use of company vehicles, please contact us. We have attached a form for you to provide information regarding vehicle usage.
The Social Security tax limit for 2021 is $142,800. The 6.2% rate for both employees and employers is unchanged. The Medicare tax is unchanged at 1.45% for employees and employers with no income limitation. Self-employed persons pay a total of 15.3% up to the Social Security limit and 2.9% above that limit. The additional .9% Medicare withholding tax has not changed and is required when an employee’s compensation exceeds $200,000. Keep in mind income subject to Social Security tax impacts retirement plan contribution limits.
FRAUDULENT ACTIVITY ALERT
Fraudulent activity remains a significant threat. Our firm takes data security seriously and we think you should as well. Fraudsters continue to refine their techniques and tax identity theft remains a significant concern. Beware if you:
Receive a notice or letter from the IRS regarding a tax return, bill, or income that doesn’t apply to you
Get an unsolicited email or another form of communication asking for your bank account number, other financial details or personal information
Receive a robocall insisting you must call back and settle your tax bill
OUR RECORDS RETENTION POLICY
Based on the standards of our profession, our firm’s policy is to retain copies of tax returns and related work papers for six years after the date of filing. We suggest taxpayers keep all of their original receipts and records for seven years. Any documentation relating to “basis” (e.g. the closing statement for a property purchase) should be kept until seven years after receipt of the final payment from the property sale is reported. We also suggest that taxpayers retain copies of their individual and business tax returns indefinitely.
Please remember that developing tax strategies prior to December 31, 2021 could affect the size of your refund come next spring or reduce your overall tax burden. We strongly encourage you to contact us at your earliest convenience to set up a time to go over your individual tax situation if that is necessary this year. We also encourage you to visit our website at www.fhjacpas.com for recent tax law changes as well as other helpful information for you and/or your business. In addition, your tax organizer will be sent to you by the first part of January.
Disclaimer: The preceding information is intended as a general discussion and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and laws applicable to the situation.
Very truly yours,
Fischer, Hayes, Joye & Allen, LLC
Personal Use of Company Auto
Fischer, Hayes, Joye & Allen, LLC - Information Sheet for Tax Year 2021
Please be advised, if you use a company owned or leased vehicle, the IRS requires that written records be maintained to document the business use of vehicles. Any unsubstantiated use of a company vehicle is considered personal use, and as such, is a taxable fringe benefit. The fair market value of this personal use is includable in your gross income and is subject to federal and state withholding as well as Social Security, Medicare, and employment taxes.
It is not necessary to substantiate business use of company owned vehicles if either of the following conditions exists:
1. You have a written policy in place that prohibits all personal use of company vehicles.
2. The vehicle is considered a qualified non-personal use vehicle. Such a vehicle is one that, because of its design, would not likely be used for personal use. (i.e. tow truck, school bus, police car)
Please complete the information below for each company owned vehicle used this year and we will calculate the taxable fringe benefit to be included in each W-2, if any.
Business Name: __________________________________________________________
Employee Name: _________________________________________________________
Description of Vehicle: ____________________________________________________
Date of purchase/lease: ____________________________________________________
Purchase price/fair market value at time of lease: _______________________________
Dates used, if less than the full year: __________________________________________
Odometer reading: Beginning _______________ Ending _________________
Was the vehicle leased? YES / NO
Was the vehicle available for personal use during off-duty hours? YES / NO
Did you have another vehicle available for your personal use? YES / NO
Did the company pay the cost of fuel consumed by this vehicle? YES / NO
Please provide the number of miles in each of the following categories:
o Total commuting miles ______________
o Total other personal (non-commuting miles) ______________
o Total business miles ______________
3295 Triangle Drive S.E., Suite 200 • Salem, Oregon 97302 Voice 503-378-0220 • Fax 503-364-1259 www.fhjacpas.com