9 Tips to Simplify Year End Tax Planning
The end of the calendar year means that tax season will be here before we know it!
Set aside some time to plan for taxes in the coming weeks so you can avoid the hectic scramble that results from being unprepared when it’s time to gather your information and file your taxes.
Block time on your calendar now – and you’ll thank yourself later!
These 9 tips will make it easy for you to file your taxes or get your tax information to your accountant on time and without stress!
1. Determine if you qualify for any tax credits.
A tax credit is a reduction of the income tax you owe. For example, if you owe $1,000 in taxes and receive $500 in tax credits, your tax bill is reduced to $500.
Tax credits are not something you want to miss out on! It is advantageous to consult with a tax professional to help ensure you are receiving all of the tax credits for which you are eligible.
On this webpage, the IRS provides information about the following tax credits and more.
Child Tax Credit
The Child Tax Credit has been a hot topic for the second part of 2021 due to the advance payments – and the opportunity to opt out in order to receive the full credit at tax time.
In 2021, the Child Tax Credit offers:
Up to $3,000 ($250 monthly) for a qualifying dependent child under age 17 on December 31, 2021.
Up to $3,600 ($300 monthly) for a qualifying dependent child under age 6 on December 31, 2021.
NerdWallet offers a simple but detailed explanation of the Child Tax Credit and its qualifications in this article.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is different from the Child Tax Credit, although many people confuse them or think they are the same.
The Child and Dependent Care Tax Credit allows eligible parents to claim up to 50% of $8,000 in child care expenses for up to two children ($16,000 total.) This boost for working families was part of the American Rescue Plan Act.
This article from CNBC provides helpful information about the Child and Dependent Care Tax Credit.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC), also called the EIC, is for low and moderate-income workers. The main requirement is that you earn money from a job.
In 2021, depending on factors including tax filing status, income, and number of children, the amount of the tax credit ranges from $1,502 to $6,728.
Tax Outreach gives a good explanation of the EITC.
Health Insurance Tax Credit
A health insurance tax credit, also called the Premium Tax Credit, lowers the cost of health insurance with a discount that can be applied each month or as a refund when federal income taxes are filed.
You can learn more about the health insurance tax credit in this article or here from IRS.gov.
2. Check your eligibility for tax benefits.
Tax benefits are opportunities to reduce your tax bill if you meet specific eligibility requirements. Similar to tax credits, you don’t want to miss a chance to save money on a tax benefit for which you qualify.
Student Loans
The interest paid on student loans for yourself, your spouse, or your dependent are tax deductible. The maximum deduction is $2,500 per year and applies to federal student loans as well as all loans used to pay higher education expenses.
In this article, Federal Student Aid discusses the tax benefits for student loans as well as all tax benefits for education.
Educational Assistance
Per IRS.gov, you can exclude up to $5,250 per year if you receive educational assistance benefits under an educational assistance program.
Specifically, this means that the benefits should not be included with your wages, tips, and any other compensation on your Form W-2.
Deductions for Educators’ Expenses
The Educator Expense Tax Deduction enables eligible educators to deduct up to $250 in qualified expenses that were not reimbursed.
This Gundling & Company Q&A of the Week discusses the eligibility requirements and qualifications.
Flexible Spending Accounts
A Flexible Spending Account (FSA) allows you to use pre-tax dollars to pay for eligible expenses for you, your spouse, and qualifying children and relatives.
FSAs are not deductible, but they do reduce taxable wages. In 2021, the maximum tax deferral for an FSA is $2,750.
Investopedia discusses FSAs and their relationship to taxes in this article.
3. Review options based on the amount of your charitable contributions.
A tax deduction of up to $300 can be claimed for cash contributions made to qualified charitable organizations in 2021.
Determine how much you have contributed throughout the year and if you plan to make any additional charitable contributions. Use this IRS Tool to make sure your recipients are eligible to receive tax-deductible charitable contributions.
There are a lot of factors with charitable contributions. We recommend starting with IRS.gov and then discussing your personal options with a tax professional.
4. Consider if deferred income is beneficial – and the timing of the deferral.
Deferred income is income that you have received but not yet earned. Typically, deferred income is a result of a client who has made an advanced payment for services or goods they have not yet received.
You are taxed on income when you receive it – and not necessarily when it is earned. Since it is treated as income, deferred income could place you in a higher tax bracket.
However, deferred income is beneficial if it allows you to reduce your present and future tax rates.
This article from Nerdwallet is a good resource to help determine if deferred income would be beneficial for your individual financial situation.
5. Gather information about gains or losses in your portfolio.
Making sure you have access to your portfolio that shows the gains and losses is helpful to get out of the way now. Investopedia offers different ways to calculate gains and losses – and provides information about special considerations.
6. If you plan to create a trust this year, contact an estate attorney now.
Creating a trust takes time – and you will not want to wait until the last minute. Please contact me if you’d like a referral to a trusted estate attorney.
7. Evaluate withholding and estimated tax payments.
The IRS Tax Withholding Calculator performs a “paycheck checkup” to make sure that you are withholding the right amount of tax from your paycheck.
To calculate estimated taxes, you add together your total tax liability for the year. This includes self-employment tax, income tax, and any other taxes. You then divide this number by 4, and make quarterly estimated tax payments.
It is helpful to evaluate these numbers so that you can stay ahead of a big tax payment at tax time – or pay less and keep more of your money available to you throughout the year.
8. Consult with an accountant
If you have questions about any of the items discussed in this article – or questions about your taxes in general – it is always best to consult with an accountant. Taxes are complicated, and accountants are your expert resources who deliver the most accurate information and try to save you the most money possible.
9. Make sure your correct address and contact information is on file for any business that may send you a tax form.
If you have moved or updated your email address, contact any business or organization that may need your information at tax time. That way, your tax paperwork won’t be delayed and you can get started filing sooner rather than later!
In Conclusion
What to Save for Tax Time is a free downloadable checklist of items that you will need at tax time. Using this checklist is great for keeping all of these essential documents in one, easy-to-find, location.
Tax planning can be stressful and time-consuming, but with preparation and organization, you will be ready to go when tax season arrives!