2021 Year-End Tax Planning Checklist

Dive into Withum’s Tax Planning Guide for your one-stop shop for annual year-end individual and business tax planning tips, including top planning considerations for specific industries.

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Single

DEDUCTION AMOUNT:
$12,550

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Married Filing Jointly

DEDUCTION AMOUNT:
$25,100

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Head of Household

DEDUCTION AMOUNT:
$18,800

Capital Gain Brackets and Rates

Taxable Income (Including Capital Gains) Over

Rate Single Married Filing Jointly Head of Household
0% Up to $40,000 Up to $80,801 Up to $54,100
15% $40,401 – $445,850 $80,801 – $501,600 $54,101 – $473,750
20% Over $445,850 Over $501,600 Over $473,750

Year-End Tax Strategies for Individuals

(Caution: As of the date of this publication, the “Build Back Better Act” (BBBA) has not been enacted into law. It is expected, though not certain, to be enacted by year end. If enacted, it may impact strategies on when to recognize income and expenses.)

General Income Tax Planning

  • Postpone income until 2022 and accelerate deductions into 2021.
    • Doing so may enable you to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of adjusted gross income (AGI).
    • Married couples with children who have an AGI around $150,000 may want to consider strategies to lower their AGI to take advantage of the expanded child tax credit, dependent care credit, and any missed recovery rebate credits (stimulus checks).
    • Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
    • BBBA would impose a new 5 percent surtax on households with AGI above $10 million and an additional 3 percent tax (for a combined 8 percent) on those with AGI above $25 million. If enacted, high net worth individuals should consider accelerating income into 2021, and deferring into 2022, to avoid these higher rates.
  • Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%,depending on the taxpayer’s taxable income. If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate, if applicable.
  • The3.8% Net Investment Income (NII) taxwill apply depending on a taxpayer’s modified adjusted gross income (MAGI) and NII for the year. Taxpayers should consider ways to minimize or eliminate (e.g., through deferral) additional NII for the balance of the year, while others should try to see if they can reduce MAGI other than NII.
    • BBBA would expand that tax base of the NII to income derived from a trade or business in which a taxpayer actively participates. This change affects taxpayers with MAGI in excess of $400,000 ($500,000 for joint filers).
  • The0.9% additional Medicare taxapplies to individuals for whom the sum of their wages received with respect to employment and/or self-employment income exceeds a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in other cases). Employers must withhold the additional Medicare tax from wages in excess of $200,000,regardless of filing status or other income.Thus, planning opportunities may exist with respect to eliminating this tax by deferring income to a later year.
  • Consider asking your employer to increase withholding of state and local taxes (or you can pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2021. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2021 state and local tax payments to exceed $10,000.
    • Although changing frequently, the latest modifications to BBBA would increase the SALT cap in 2021 to $80,000 through 2030. This would cause more taxpayers to itemize in 2021.
  • Relocation of residency and domicile for purpose of reducing or eliminating individual state taxation. For example, common states where people move to reduce state taxes are Florida, Texas, Wyoming, and Nevada.
  • Consider increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you were in a federally-declared disaster area, you may want to settle an insurance or damage claim in 2021 in order to maximize your casualty loss deduction this year.

Capital Gain Planning

  • Should I sell stocks/bonds now or wait for the new year? Capital gain rates are always top of mind for clients, especially for those with substantial unrealized gains or business owners looking to sell their business. An increase in capital gain rates, even by a few percentage points, could make the difference between selling now or later.
  • If you expect capital gain rates to rise, and they are not presently scheduled to rise under the latest iteration of the BBBA, then you could sell stock now and reestablish the position immediately after the sale. With publicly-traded stock, recognizing the gain can be done with an actual sale or a constructive sale, such as a short sale against the box. Also, the wash sale rules do not apply to recognized gain, so there is no risk of having the gain deferred as there would be with selling stock at a loss and then buying it back.

Estate Tax Planning

  • To give or not to give? The estate tax is once again becoming a hot button issue once again, even with the lifetime exemption currently set at $11.7 million per person. The question is whether any gift given now that uses up the exemption will be grandfathered if there is a future change to the exemption amount. The IRS has issued favorable proposed regulations, so no claw-back is expected. If you have not done so already and are comfortable surrendering control of assets to the next generation, it might be a good idea to take advantage of the $11.7 million per individual lifetime exemption in 2021, or $23.4 million for a married couple. The prevailing view is that the current lifetime exemption amount is as good as it gets, and using it up before it’s gone might be your best bet regardless of proposed legislation.
    • The proposal to cut the lifetime exemption to $6 million per individual was removed from the latest draft of BBBA. The lifetime exemption is set to be cut automatically in 2025 due to expiring provisions in the 2017 TCJA.

Tax-Advantaged Accounts

  • It may make sense to convert all or part of your eligible retirement accounts (e.g., traditional IRA) to a Roth IRA before year-end. However, such a conversion will increase your AGI for 2021, and possibly reduce tax breaks that are tied to AGI (or MAGI).
  • Taking versus delaying required minimum distributions (RMDs) from your IRA or 401(k) (or other employer-sponsored retirement plans).

Charitable Gifting

  • Consider bunching charitable deductions in the current year with a donor-advised fund, so you increase your charitable deduction and therefore your itemized deductions above the standard deduction. The benefit would be that you can deduct the charitable contribution this year and allocate charitable funds from the donor-advised fund to individual charities in later years.
  • Make gifts sheltered by the annual gift tax exclusion before the end of the year. The exclusion applies to gifts of up to $15,000 made in 2021 to each of an unlimited number of individuals.
  • Consider making 2021 charitable donations via qualified charitable distributions from your IRAs. When you reach age 70½, the contribution is neither included in your gross income nor deductible as an itemized deduction and the amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
  • If Democrats win the election, you should consider accelerating gifts into 2020 and taking advantage of lower asset valuations available in 2020 due to the pandemic.
  • QBI Deduction
    • Businesses operating as sole proprietorships, partnerships, S corporations, and some trusts and estates may be entitled to a deduction of up to 20% of their qualified business income (QBI). If a qualifying taxpayer’s taxable income exceeds a certain threshold amount, then the deduction may be limited based on: whether the taxpayer is engaged in a service-type trade or business (SSTB, such as law, accounting, health, or consulting); the amount of W-2 wages paid by the trade or business; and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.
    • Taxpayers may achieve significant savings with respect to this deduction by deferring income or accelerating deductions so to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2021. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end.
  • SALT Deduction Limitation Workaround
    • Several states have recently passed legislation to circumvent the $10,000 SALT deduction limitation (19 states in total including NJ & NY).
    • IRS Notice 2020-75 confirmed these Pass-Through Entity Tax (PTET) elections would allow businesses to fully deduct state and local taxes from the entity’s taxable income.

State Tax Credits

  • States offer various tax credits and incentive programs aimed at attracting businesses and stimulating investment, and retaining businesses currently operating within their borders.
  • Determining the best market for your business to incorporate and/or operate is a critical decision – do not overlook the tax credits and incentives that may be available.
  • Common opportunities from states and/or localities may target—
    • Small & mid-sized businesses
    • Larger businesses
    • Innovative businesses
    • Job creation
    • Capital investments
    • Angel investors
    • Specifically targeted industries, such as technology, manufacturing, agriculture, or film
    • Geography, such as distressed zones, enterprise zones, or tax-increment finance districts
    • Energy credits
    • Not-for-profits

Contact Us

No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities. Speak with Withum’s State and Local Tax Team to determine what credits or incentives may be available to you.

Year-End Tax Planning for Businesses

The corporate tax rate is currently a flat 21% rate. This tax rate may change under the BBBA, but current versions of the BBBA do not include a rate increase to the corporate income tax rate.

Limits on Deduction of Business Interest

Every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income (ATI). The net interest expense disallowance is determined at the tax filer level; however, a special rule applies to pass-through entities, which requires the determination to be made at the entity level, for example, at the partnership level instead of at the partner level.

  • For 2021, ATI generally is computed without regard to deductions allowable for depreciation, amortization, or depletion.
    • Exemptions from Limits on Deduction of Business Interest:
      • An election to be excepted from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that does not exceed $26 million.
      • Real property trades or businesses can elect out of the provision, but they must use ADS to depreciate applicable real property used in a trade or business instead of bonus depreciation.
      • An exception from the limitation on the business interest deductions is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats or farm machinery for sale or lease and secured by such inventory).
  • Expansion of small businesses that are able to use the cash (as opposed to accrual) method of tax accounting. To qualify as a small business, a taxpayer must, among other things, satisfy a gross receipts test (during a three-year testing period, average annual gross receipts cannot exceed $26 million). Cash method taxpayers may find it a lot easier to shift income, e.g., by deferring billings until next year by accelerating expenses, e.g., paying bills early.

NOTE: If a taxpayer can meet the small business gross receipts test, there may be certain benefits in using the below methods of accounting. Please discuss with your Withum Tax advisor.

  • UNICAP – not required to capitalize additional costs to inventory
  • Allow inventory to be treated as non-incidental materials and supplies, or any method that represents financial accounting treatment of inventory
  • Percentage-of-Completion Method is not required for long-term construction contracts
  • Consider making expenditures that qualify for the liberalized business property expensing option.
    • For 2021, the expensing limit is $1,050,000, and the phase-out starts at $2,620,000. This means there is a dollar-for-dollar reduction in the expensing limit after spending exceeds $2,620,000, and the entire deduction would disappear when spending reaches $3,670,000. Bonus depreciation generally can still be taken after the spending cap is reached.
    • Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and business-use vehicles (though restrictions apply).
    • Expensing is also available for “qualified improvement property” (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), as well as roofs, HVAC, fire protection, alarm, and security systems.
    • The expensing deduction is not prorated for the time that the asset is in service during the year. Thus, property acquired and placed in service during the last days of 2021, rather than the beginning of 2021, can result in a full expensing deduction for 2021.
  • 100% Bonus First-Year Depreciation – Businesses are permitted a deduction for machinery and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. The 100% write-off is permitted without any proration based on the length of time an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2021.
  • De Minimis Safe Harbor Election– Also known as the book-tax conformity election, this election is an administrative convenience that allows businesses to deduct small-dollar (i.e., up to $2,500 or $5,000 per invoice) expenditures for the acquisition or production of property that otherwise would have to be capitalized, other than amounts paid for inventory or land.
  • Cost Segregation Benefits– Cost segregation studies allocate building costs to tangible personal property so that depreciation deductions can be taken sooner rather than later.A building generally is non-residential real property (39-year property) or residential real property (27.5-year property) eligible for straight-line depreciation. Equipment, furniture and fixtures are tangible personal property that is generally depreciated over 5 or 7 years and is eligible for accelerated depreciation (e.g., double declining balance, bonus depreciation, and §179 expensing). By segregating the costs between the building and the tangible personal property, the costs allocable to the tangible personal property can be written-off sooner than the costs allocable to the building.
  • Income Acceleration – Certain corporations (other than large corporations) that anticipate a small net operating loss (NOL) for 2021 and substantial net income in 2022 may find it worthwhile to accelerate just enough of its 2022 income (or to defer just enough of its 2021 deductions) to create a small amount of net income for 2021. This will permit the corporation to base its 2022 estimated income tax installments on the relatively small amount of income shown on its 2021 return, rather than having to pay estimated taxes based on 100% of its much larger 2022 taxable income.
  • To reduce 2021 taxable income, consider deferring a debt-cancellation event until 2022.
  • To reduce 2021 taxable income, consider disposing of a passive activity in 2021 if doing so will allow you to deduct suspended passive activity losses.
  • Employee Retention Tax Credit– Employers who experienced a 20% or greater reduction in gross receipts in any calendar quarter in 2021 compared to the same calendar quarter in 2019, or who were subject to certain government orders due to COVID-19 may be eligible to claim a credit up to $7,000 per employee per quarter to the first three quarters of 2021.
  • ERC Recovery Startup Business -Businesses who started on or after February 15, 2020 can receive an employee retention credit of up to $50,000 for Q3 and Q4 2021 (max credit of $100,000 for 2021). These businesses do not need to show a reduction in gross receipts or have been subject to a government order to qualify.
  • Section 1202 Stock – For certain C corporations satisfying an active trade or business requirement, shareholders that hold original issuance stock for more than five years can be eligible to have gain on the sale of such sock excluded from tax, to the extent of the greater of $10 million or 10 times the original tax basis.

Contact Us

No action should be taken without advice from Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities. Reach out to discuss your individual situation as year-end approaches.