Tax season is upon us, and many taxpayers are focused on filing their 2020 tax returns. Even though the tax filing deadline was extended to July 15 last year, due to the pandemic, don’t expect extra time this year. The tax-filing deadline for 2021 is, as usual, April 15.
But besides hustling to get this year’s tax return in on time, taxpayers should also be planning out what they can do to reduce their tax bill for the 2021 tax year, too. With the new presidential administration coming in and the ongoing pandemic, it’s possible that tax priorities may change. Until then, however, see how you can get ahead for next year with these 15 tax-planning issues for 2021.
Last Updated: Feb. 15, 2021
2021 Tax Planning Begins Now
Most taxpayers do their taxes reactively, said wealth manager Kirk Chisholm of Innovative Advisory Group. Instead, he recommended being proactive with tax planning.
“In September, you should try to estimate your year-end numbers, and see what can be done to reduce your tax burden,” he said. “Examples where this could be helpful include year-end tax loss selling, contributing to an IRA or 401k or making legitimate purchases for your business.”
Make Your Estimated Tax Payments
The CARES Act made it possible to defer self-employment taxes due in 2020. However, don’t expect a repeat in 2021. Instead, if you have a fluctuating income, be sure to update your estimated tax payments so you don’t underpay, said financial blogger and entrepreneur Jim Wang of Wallethacks.
“Your income might fluctuate because you started earning freelance income or sold property, such as stock,” he said. “So recalculate your tax liability, and make sure you pay enough to fall into the safe harbor amount for both federal and state taxes.”
Max Out Your Company Retirement Plan
Now is the time to arrange to max out your company retirement plan — such as your 401k, 403b or 457, said Chisholm. For 2021, the maximum you can contribute is $19,500 — the same as in 2020. “At minimum, you should contribute up to the max that your employer matches your contributions, Chisholm said. This should also lower your taxable income for the year.”
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Work Opportunity Tax Credit Extended
This business tax credit was extended through 2025 for companies that hire certain target groups of employees, such as veterans and individuals who are considered long-term unemployed (out of work for more than 27 weeks). This credit is a win-win if the business is able to hire a top-notch employee and qualify for the credit at the same time.
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Don’t Be Surprised by How Much You Owe
Filers often find themselves owing too much money or more than they expected, said Jeff Haywood, CPA and owner of the blog The CPA Superhero. “To address this issue, they could reduce their taxable income by looking for additional deductions to take — either for their business or personally on their schedule A,” he said. “And they should check to find out if they qualify for any of the available tax credits.”
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Deduct Your Private Mortgage Interest Premiums
Once eliminated by the Tax Cuts and Jobs Act of 2017, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 has brought back the tax deduction for private mortgage interest premiums through the end of 2021 for taxpayers whose AGI is $100,000 or less. To get the deduction, report your PMI premiums as interest, using Schedule A, Itemized Deductions, Form 1040 when you file your taxes in 2022.
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Document All Your Deductions
Another big issue for filers is the dreaded tax audit, Haywood said. “Most audits I have seen — and there have not been many — are now handled through the mail, where the IRS asks for documentation for a deduction,” he said. “Where I have seen these is with deduction amounts that are unusually high. So don’t be afraid to take the deduction, but make sure you keep the documentation to support the deduction.”
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Keep Good Records of Your Investments
It’s not uncommon for tax fliers to get an IRS notice saying that they owe a large amount of taxes from an unreported sale of stock, said Haywood. Filers might not think they need to report the transaction if they lost money on the sale. However, the gross sale amount does get reported to the IRS, which will then send you a notice that you owe tax on the proceeds without considering your cost — and that could result in a shockingly large bill, he said.
“With the sale of stocks, you report both what you sold the stock for and your cost or basis in the stock, which reduces your taxable amount, maybe to zero or a loss,” he said. “If you get the notice, don’t panic. Simply amend your return, showing both the proceeds and your cost, and likely you won’t owe as much — and maybe won’t owe at all.”
Don’t Lose Track of Your Documents
Staying organized is key for all tax documents in general. You might receive documents after filing, or they get lost and are not properly included on your tax return, said Haywood. “To avoid filing an amended return to add the missing information, start making a list of all the income and deductions you received during the year,” he said.
“For my clients, I will compare what they have for the year with what they had the prior year and ask about anything that seems to be missing,” he said. “A tax flier can make a list of what they had last year and use it to make sure they have everything for this year.”
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Be Aware of Minimum Filing Requirements
“Even if you do not meet the minimum income filing requirements to file a tax return, you should always consider preparing a tax return,” said Monique LeMons, Senior Development Manager at Intuit. “There are certain credits such as the Earned Income Tax Credit that you may qualify for, depending on your income and dependent situation, that could result in a refund.”
Selling or Donating Unwanted Goods
If you have unwanted goods, there are potential tax implications whether you sell or donate those items, so it’s important to know what the IRS requires. “For a charitable donation to have an effect on your tax return, you must have enough deductions to allow you to itemize your deductions,” said LeMons.
“If your itemized deductions are not greater than your standard deductions, then any donations you make to charity will not help in reducing your taxes,” she said. “Alternatively, if you sell an item, the income you receive from the sale is not reportable, unless you received more money than what you paid for it.”
If you do itemize, the CARES Act increased the limit on charitable deductions by individuals to 100% of adjusted gross income through 2021.
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If you’re considering installing solar panels on your home, there are potential tax incentives, said LeMons. The tax credit for solar has been extended for two additional years at the reduced 26% credit amount, according to Taxpayer Certainty and Disaster Tax Relief Act of 2020. That means you have until the end of 2022 to install the panels.
Determine Your Filing Status
If you’re married, you might automatically think that filing jointly is the most beneficial choice. However, that might not necessarily be the case.
“The best way to determine if you should file ‘married filing joint’ or ‘married filing separate’ is to prepare your return both ways — or ask your preparer to do it for you,” said LeMons. “Generally, it is more beneficial to file ‘married filing joint’ for tax purposes.”
Be Prepared for Meetings With Your Tax Advisor
“Don’t show up for a meeting with your tax preparer without everything you’ll need, [and] don’t be afraid to ask in advance when you’re setting your appointment,” said Eric Roffer, Esq., a licensed tax professional.
“Keep in mind that tax season is incredibly busy for accountants and tax professionals alike. You may not get a chance to reschedule.”
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Include All Income on Your Return
Never consider any income you receive throughout the year as non-taxable, said Roffer. That’s a big mistake. “Keep an accurate record of anything you sell, money you win, money from side work — even valuable property that you find on the street,” said Roffer. “Any discrepancies between what you report to the IRS and what you actually brought home can spell trouble for you down the road.”
Verify Tax Information From Your Employer
You might not think to verify the tax documents your employer sends you, but you could miss an important mistake if you don’t. “Don’t forget to double-check all of your tax info with your payroll department,” said Roffer. “More specifically, make sure that you’re withholding the proper tax on each paycheck.”
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Roger Wohlner contributed to the reporting for this article.