By Peter Craig
Tax season has begun! The IRS has started to accept tax fillings for the 2021 tax year and accountants everywhere are ready for another brutal season. With the IRS saying to expect delays from the get-go, returns could be delayed — especially if filing by paper. Regardless of how quickly your return is processed, here are a couple of actions and regulation changes that you should be aware of before you file.
IRAs and Retirement Plans
Tax-advantaged retirement savings plans, such as your 401(k) and/or traditional IRA, can help reduce your taxable income. These contributions are made on a pre-tax basis and may be fully or partially deductible, depending on your filing status and income. While the deadline to fund your employer-sponsored 401(k) is December 31st, IRAs can be funded up until the tax filing deadline of April 18th. For 2021, the IRA limits are $6,000 or $7,000 if you are over 50 years or older.
Health Savings Account (HSA)
These accounts allow you to claim a tax deduction for contributions that you, or someone other than your employer, make to your HSA, even if you do not itemize your deductions. Contributions made to your HSA made by your employer (including cafeteria plans) may be excluded from your gross income and the interest or other earnings on the assets in the account are tax free. Distributions may also be tax free if you use them to pay qualified medical expenses. The maximum contributions for the 2021 tax year are $3,600 for individuals and $7,200 for families. There is also an extra $1,000 catch up provision for those 55 years and older. Just like the IRA, these contributions can be made up until the filing deadline of April 18th.
With the higher standard deduction amount for 2021, many who used to itemize are finding that it does not make sense unless the total is more than the standard deduction amount. Consider grouping your “once a year” deductions into “twice the amount every other year” to accelerate your deduction totals and improve your tax liability. Also, you may want to defer income sources to future years if your tax bracket may be lower then.
If you do itemize, two deductions that can impact your totals but are often overlooked are:
- Smaller out of pocket charitable contributions. Larger deductions made via checks or payroll are hard to miss, but the smaller items, like miles driven in service of a charitable organization or the cost of stamps to mail out a school fundraiser flier, tend to be forgotten. These expenses can add up quickly!
- Medical expenses not covered by insurance. Medical expenses that exceed 7.5% of your adjusted gross income can be taken as a deduction. The list of qualifying expenses is quite broad and definitely something to consider. This can include Medicare Part B and Part D premiums. Keep your receipts and tally the costs!
Tax law changes to consider for the 2021 tax year
- Personal exemptions were eliminated.
- Standard deduction increases to $12,550 ($25,100 for married couples, $18,800 for head of household)
- The deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately).
- The overall limitation on itemized deductions based on the amount of adjusted gross income was eliminated.
- Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt.
- The deduction for personal casualty and theft losses was eliminated, except for casualty losses attributable to a federally declared disaster.
- For 2021, the child tax credit amount increased, the credit was extended to children 17 and younger, and the credit is refundable for most taxpayers if it exceeds tax liability.
Tax planning should be done throughout the year, not just come April. Staying organized and tracking expenses will help ensure that none of your deductions or contributions are overlooked.
About the author: Peter Craig
Peter Craig is an Investment Advisor Representative with A&M Financial Services, LLC, in Westbury, NY, providing highly personalized investment management and financial planning. His inspiration comes from helping business owners, mass affluent, and the next generation plan for the future. Peter can be reached at firstname.lastname@example.org.
Securities and investment advisory services offered through Royal Alliance Associates, Inc. (RAA), member FINRA/SIPC. RAA is separately owned and other entities and/or marketing names, products or services referenced here are independent of RAA.