Reduce Your Tax Liability with These Last-Minute Financial Moves
When it comes to your 2021 tax return, your ability to change most of those numbers ended when the ball dropped at midnight. The majority of the information on your return this tax season is now set in stone—but not all of it. There are actually a few moves you can still make to reduce your 2021 tax liability, despite the turning of the calendar to a new year. Here are 5 last-minute tax moves you can still consider making in order to reduce your tax burden.
Make Retirement Account Contributions
Unlike most tax deductions, contributions you make to your retirement account now still qualify for a deduction on your tax return. You can continue making contributions to your traditional IRA account through April 15, 2022, and deduct the amount you contribute on your 2021 tax return. Note that this only applies to IRAs, and not to 401(k)s or any other type of retirement accounts. (As Roth IRAs don’t ever qualify for a tax deduction, they’re not relevant for this tax move either.)
If you don’t yet have a traditional IRA, and you want to reduce your 2021 tax liability, they are quick and easy to set up through your financial institution. You can then max out your IRA contributions (up to $6,000 for those under 50, and up to $7,000 for those 50 and older) for the 2021 tax year and deduct that amount on your return for some big tax savings.
Look into Opportunity Zones
The 2017 Tax Cuts and Jobs Act (TCJA) set up over 8,700 low-income “opportunity zones” across the country. Both individuals and businesses can invest in these areas and defer or otherwise avoid capital gains taxes on those investments. As with most tax laws, there are specific stipulations to qualify for those tax deferments. Here’s an example of how an opportunity zone could help you save on your taxes:
You have $100,000 in a stock portfolio that has given you $50,000 in gains. Depending on your tax bracket, you could owe up to $10,000 on this investment. However, instead of paying that capital gains tax, you could roll those gains into a Qualified Opportunity Fund, which would allow you to defer those taxes until the end of 2026, or until you have an inclusion event (whichever comes first). You must invest in the Qualified Opportunity Fund within 180 days of realizing the gain on your investment.
These Qualified Opportunity Funds allow taxpayers to receive a tax benefit in exchange for investing in local businesses and real estate projects in these low-income opportunity zones. As you can probably guess from the example, the specific rules surrounding this tax benefit are quite complex, so we strongly encourage you to work with one of our CPAs if you hope to take advantage of opportunity zones and deferred taxes. However, the bottom line here is that it’s not too late to take advantage of this for your 2021 tax return.
Change Your Company’s Accounting Method
If you’re looking to reduce your tax liability for your business’s 2021 return, changing your accounting method can be a last-minute way to do so. Businesses can utilize one of two different accounting methods: accrual basis (reporting the income when it’s earned) and cash basis (reporting the income when you’re paid). Typically, if you currently report on an accrual basis, switching to a cash basis now will reduce your 2021 tax liability. This is because most businesses won’t be paid for the work performed in December of 2021 just yet, so your income for last year will be lower when switching to a cash basis. Obviously, this is a one-time way to save on your business’s taxes; however, the savings can be quite significant, depending on just how much you earned in December.
Take Advantage of the Qualified Business Deduction
Here’s one more last-minute tax saver for business owners: the qualified business deduction. However, this is less of a tax move and more of a tax reminder that can offer you significant savings. Under the qualified business deduction, sole proprietors and business owners can deduct up to 20% of their income before even beginning to itemize their other business deductions. If you earned under $315,000 in 2021, you can likely take the full 20% deduction; above this income level, the deduction will steadily decrease until it phases out entirely for business income exceeding $415,000. So, if you’re a business owner, don’t forget about this extremely valuable deduction!
Ensuring that you take advantage of every possible deduction and credit can be difficult to do on your own—but Demian & Company CPAs can help. Schedule a meeting with us today to learn what tax moves you can still make, and we’ll help ensure you get the deductions you deserve on your return.