Tax Day is around the corner, what do you need to know for getting the most out of your tax filing? I encourage my clients to involve their financial advisor in their tax decisions. The actual filing may be handled by an accountant or, depending on the complexity of the return, online through a tax filing software.
Here are 10 tax tips to remember:
For most people the due date for filing your taxes is April 18th BUT you can file an extension and push the date to Oct 17th
Know your options – for example, many self-employed or remote workers can take deductions like business or home office expenses! TurboTax reports[1] the home office deduction may be one of the biggest work-from-home expenses a self-employed person can take since you can take a deduction that is a portion of your home mortgage interest or rent, property taxes, homeowners’ insurance, utilities, and depreciation based on the square footage of space used directly and exclusively for your business.
Know your IRA Options: SEP (Self-employed, check out my recent blog on advantages of a SEP IRA), Traditional IRA and Roth IRA.
If you are self-employed – small business owners, contractors, or gig economy workers can still open a SEP IRA. Unlike a 401k, you can set up and fund your SEP until you file your taxes for the previous year. If you’re self-employed, your contributions are generally limited to 20% of your net income (eligible compensation limit, indexed for inflation by IRS is $290,000 for 2021). You can contribute up to 25% of the employee’s total compensation or a maximum of $58,000 for the 2021 tax year (whichever is less). Contributions must be the same for employers and employees up to the specified limit.
What are the benefits of a Traditional IRA? If you are doing a Traditional IRA, you can contribute $6,000 and if age 50 or older you can do an additional $1,000. Keep in mind the ability to deduct this is dependent on your participation in your workplace retirement plan. If you cannot do a Traditional IRA, you may still qualify for a write-off for a spousal IRA. Your spouse may be able to deposit money in their own IRA based on your earnings (even if they do not work outside the home). Contributions are the same.
Consider the Roth IRA – even though there is no deduction because these contributions are made with after-tax dollars, it is important to consider the long-term tax implications, when taxes might be higher. Current rates, enacted by former President Trump will sunset after 2025, triggering higher levies possibly for Americans in 2026. If you are able to do an individual Roth IRA or Roth 401k, it might be worth exploring.
Look at contributions to your Health Savings Account (HAS) – These accounts offer three tax breaks: write off for contributions, tax-free growth; and tax-free withdrawals allowed for qualified medical expenses. Individuals can contribute $3,600 for 2021 and family plans you can contribute up to $7,200.
Don’t overlook last minute tax deductions – You might want to consider accelerating deductions this year. For example - contributing to a charity is a great way to get a deduction. According to TurboTax, nearly 90% of taxpayers that now claim the standard deduction instead of itemized deductions standard deduction could be missing out on a valuable tax deduction if they can itemize[2]. If you think your qualifying expenses will exceed the standard deduction which is $12,550 (for single) and $25,100 (if married, filing jointly) then you likely should maximize your deductions and itemize. I advise my clients to take advantage of as many deductible expenses as possible to surpass the standard deduction.
Keep track of all your forms – it can be daunting as tax receipts are coming in the mail and more frequently, online. If you haven’t them scattered in different places, create a folder on your laptop for e-documents. Make copies of physical documents and scan them into your folder to alleviate stress around tax prep.
Lastly, don’t rush it. TurboTax recommends taking time to verify basic information such as dependents’ correct birth-dates and social security numbers, which is required to claim valuable tax deductions and credits such as Earned Income Tax Credit (EITC), Child Tax Credit (CTC), or the credit for other dependents. If you were eligible for the third stimulus payment, but only received a partial or none at all, you may be able to claim a recovery rebate credit when you file your 2021 taxes. Recovery Rebate Credits can increase your tax refund and lower the amount you owe.
Maxwell Tax Tips
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59.5 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRA penalty tax. Limitation and restrictions may apply.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59.5 may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
[1] https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/your-top-tax-questions-about-working-remotely-answered-47371/
[2] https://blog.turbotax.intuit.com/tax-planning-2/the-tax-deadline-is-approaching-turbotax-shares-8-things-you-need-to-know-43560/