Did you know that there are still some key tax transactions you can make to reduce the taxes you owe and put you in a better position when filing your return? We have some tips to help you learn more—and please reach out to our team for additional insights that could save you even more this tax season.
Rev up your retirement accounts
A key tax-saving move is to increase the amount of money you put into your eligible retirement account for 2021. You still have until the April 15 deadline to do so. Making a deductible contribution will lower your tax bill this year and help you create future financial security. For 2021, the maximum IRA contribution is $6,000 ($7,000 if you’re age 50 or older by the end of the year). If you’re self-employed, the maximum annual addition to SEPs and Keogh plans for 2021 is $58,000. All these contributions will compound on a tax-deferred basis, which can really lower your tax obligations now.
Make any estimated tax payments you owe
If you’re a self-employed business owner and didn’t pay enough to the IRS in estimated taxes during the year, you may owe a significant amount of tax, interest and penalties. Per IRS rules, you must pay 100 percent of last year’s tax liability or 90 percent of this year’s in order to avoid an underpayment penalty. (If your adjusted gross income for 2020 was more than $150,000, you’ll have to pay more than 110 percent of your 2020 tax liability to be protected from a tax year 2021 underpayment penalty.) If you make an estimated payment by January 15, 2022, you can erase any penalty for the fourth quarter, but you’ll still owe a penalty for any earlier quarters you didn’t pay. (Note: There’s a balance when it comes to paying too much vs. too little in taxes. Paying too much gives the IRS an interestfree loan, and they won’t pay any interest on taxes you overpay.)
Determine whether you could benefit from itemizing your deductions
The standard deduction may be easier in the short term. But if you’re self-employed, own a home or live in a high-tax area, you may save more money by itemizing—especially when your qualified expenses add up to more than the 2021 standard deduction of $12,550 for most singles and $25,100 for most married couples filing jointly. This may be the case if you had significant medical expenses, too.
Consider the home office tax deduction
To claim the home office deduction, you must use the space you’re claiming exclusively for business. You’re entitled to write off expenses associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). Something new to consider this year: It used to be that if you used a percentage of your home for a home office, under the previous tax rules, that percentage of the profit did not qualify as tax-free when you sold your home. This no longer applies; however, you do have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. This amount is taxed at a maximum rate of 25 percent.
File your taxes and pay them on time
Delays happen. If you can’t finish your return on time, make sure you file Form 4868 by April 18, 2022, to get an extension of the filing deadline until October 15, 2022. You’ll still need to make a reasonable estimate of your tax liability for 2021 and pay any balance due with your request. If you file and pay late, the IRS may assess a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent per month of the tax due.
Enlist our firm’s help
Do you have a complex return? Or do you have both business and personal taxes to take care of? If you don’t feel confident doing your own taxes, our professional team is here for you. Contact us to learn more about how we can work with you to make tax season as stress-free as possible.