Year-End Tax Planning: A Guide for Individuals and Businesses

Have you started tax planning? Or do you find the whole ordeal somewhat intimidating?

From looking at the new legislation to correctly timing income to thinking about retirement plans to making the most of deductions, year-end tax planning is filled with dread for entrepreneurs, small business owners, and large businesses alike. While talking to a financial professional is worthwhile in many situations, brushing up on the basics is always a wise move.

This guide will provide a walkthrough of some tips and tricks for individuals and businesses that can favorably influence your tax liability.

The Major Influence on 2021-2022 Year-End Tax Planning

On November 19th, 2021, the U.S. House of Representatives passed their Build Back Better Act. In short, it’s a set of social spending measures that aims to improve education, healthcare, the environment, and more.

Sounds great, right? But here’s the kicker — the tax implications for both individuals and businesses are major. After all, the funding must come from somewhere.

To get an overview of the most significant tax changes made by the Build Back Better Act, consult the lists below:

Primary Tax Changes for Individuals

  • Limit IRAs contributions as soon as balance equals $10 million and increase minimum distributions for the same accounts
  • New 5% surcharge for incomes over $10 million, plus an extra 3% surcharge for incomes over $25 million
  • Extend American Rescue Plan Act Child Tax Credit (CTC) to ensure its refundable permanently
  • Extend American Rescue Plan Act temporary expansion of Earned Income Tax Credit throughout 2022
  • Raise state and local tax deduction from $10,000 to $80,000 until 2030

Primary Tax Changes for Businesses

  • 15% minimum tax on corporate book income for corporations turning profits in excess of $1 billion
  • 1% excise tax on stock repurchases during the taxable year (contributes to pensions, ESOPs, and pensions excluded)
  • Reduce deduction for Foreign-Derived Intangible Income to 21.875%
  • New limit on interest expense deductions for specific multinational corporations

Properly Timing Income and Deductions

With all those changes in mind, knowing whether to accelerate or defer income and deductions is an ongoing conundrum.

Usually, we suggest deferring income which in turn defers taxes, as well as accelerating deductions to decrease taxes. But this standard way of thinking needs adapting to the hike in corporate tax, capital gains rate, and the “millionaires’ surtax.” Not to mention your personal/company situation plays a big role in appropriately timing finances.

Tips for Businesses

If your business uses the cash accounting method, you have more flexibility here. For instance, you could delay billing for work toward the end of the year, so you don’t receive payment until later. Plus, you can accelerate deductions by bulk-buying supplies, paying bonuses, and settling bills.

On top of that, it’s a good idea to service or purchase machinery and equipment before filing. Then, you can decide on your best write-off option.

For slow-moving products, you should consider donating them to charity. As I’m sure you know, you’ll receive tax deductions for this. However, it’s limited to the low end of fair market value.

Tips for Individuals

If you have a taxable income below the 25% tax rate threshold (i.e., $400,000 for single filers, $450,000 for joint), your main concern is deciding whether to realize your profits before the year ends. To do this effectively, ensure you consider whether you can defer capital gains tax by reinvesting the money into a Qualified Opportunity Fund.

Regardless of your taxable income, make sure your end-of-year selling choices put investment implications above tax results.

Thinking About Retirement Plans

Have you reached your required minimum distributions (RMD) for IRAs starting date? If so, make sure you take them before the end of the year.

Remember, the starting age for RMDs is 72, provided you were born after June 30th, 1949. That said, you can choose to defer your first distribution until April 1st, 2022. Just be aware that you’ll be forced to take two RMDs in the same year if you do so.

If you took loans from your retirement plan in 2020, ensure you repay them before the year ends. The repayment was suspended during 2020, but most are due now.

Considering Coronavirus Loans and Distributions

If you took any coronavirus loan or distribution in 2020, you need to take year-end action, such as:

  • Repaying qualified COVID-19 distributions — The sooner you replace the funds, the better your opportunity for tax deferrals.
  • Reporting ⅓ of 2020’s distribution — This doesn’t apply if you reported the entire amount on your 2020 return. Otherwise, make sure you factor it into withholding and estimated 2021 taxes (you could incur penalties if not).

The Bottom Line

Whether you’re an individual or a business, employing the help of a tax professional will make your year-end tax planning much easier. But with this guide handy, you’ve got the basics under your belt.

Have tax questions? Ask Us.

The first step to hassle-free accounting, tax returns, and tax planning starts by reaching out to one of our representatives.

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Robert Hall and Associates Tax Consultants