TAX PLANNING GUIDE 2021-2022 - Year-round strategies to make the tax laws work for you - Hancock Askew
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2021-2022
TAX PLANNING GUIDE
Year-round strategies to make the tax laws work for you
www.hancockaskew.com
Dear Clients and Friends, Although you can’t avoid taxes, you can take steps to minimize them. This requires proactive tax planning — estimating your tax liability, looking for ways to reduce it and taking timely action. To help you identify strategies that might work for you in 2021, we’re pleased to present this tax planning guide. It features many “What’s new!” sidebars summarizing some of the most significant tax law changes that have gone into effect this year, and it notes some other tax law changes that have been proposed. It also provides a refresher on the extensive changes that generally went into effect three years ago under the Tax Cuts and Jobs Act (TCJA) — and their potential impact on tax planning. Finally, it shows how various strategies apply to different situations, and presents charts and case studies to illustrate some specifics of tax planning. Understanding the ins and outs of recent tax law changes, as well as the TCJA, and determining which steps to take isn’t easy. That’s why it’s important to work with an advisor who understands their complexities and is well versed in the full range of actions you can take to save tax. We can provide the advice you need, based on our deep knowledge of tax law, including even the most recent changes, and our years of experience in helping clients like you minimize taxes. We would welcome the opportunity to help you map out a tax plan that takes full advantage of all strategies available to you. Most tax reduction strategies must be implemented by Dec. 31 — and some even sooner. So please contact us at your earliest convenience to discuss how we can help you develop a tax plan for 2021 and beyond. We look forward to working with you to maximize your tax savings. Best regards, Hancock Askew & Co LLP
“Uncertainty” is the watchword
for 2021 tax planning
fter the tumultuous year that was 2020, “uncertainty” remains the watchword in 2021, especially
A when it comes to tax planning. The shift of political control in Washington and the evolving
pandemic and U.S. economic situation could result in more tax law changes — or not.
To take advantage of all available breaks, you first need to be aware of relevant tax law changes that
have already gone into effect. While major changes under 2020’s CARES Act have largely expired,
some have been extended or even expanded by the Consolidated Appropriations Act (CAA), signed
into law late last year, or the American Rescue Plan Act (ARPA), signed into law in March. The latter
two laws include other tax law provisions as well. You also can’t forget about the massive Tax Cuts and
Jobs Act (TCJA) that generally went into effect three years ago but still impacts tax planning. Finally,
you need to keep an eye out for more tax law changes that could affect 2021 planning.
This guide provides an overview of some of the most significant tax law changes going into effect this year
and other key tax provisions you need to be aware of. It offers a variety of strategies for minimizing your
taxes in the current tax environment. Use it to identify the best strategies for your particular situation with
your tax advisor, who also can keep you apprised of any new tax law developments that might affect you.
Contents
Income & Deductions................................................2 Click here
Family & Education...................................................4 Click here
Investing....................................................................6 Click here
Business......................................................................8 Click here
Retirement...............................................................12 Click here
Estate Planning........................................................14 Click here
Tax Rates..................................................................16 Click here
2 Income & Deductions
What can you deduct in 2021?
lthough most TCJA provi- The combination of a higher standard Mortgage interest deduction. You
A sions went into effect a few
years ago, that 2017 law is
deduction and the reduction or elim-
ination of many itemized deductions
generally can claim an itemized
deduction for interest on mortgage
still having a significant impact on means that some taxpayers who once debt incurred to purchase, build or
planning for income and deductions. benefited from itemizing are now better improve your principal residence
For example, the TCJA generally off taking the standard deduction. and a second residence. Points paid
reduced tax rates, and deductions related to your principal residence also
save less tax when rates are lower. State and local tax deduction may be deductible. Through 2025,
The TCJA also reduced or elimi- Under the TCJA, through 2025, your the TCJA reduces the mortgage debt
nated many deductions. But some entire itemized deduction for state limit from $1 million to $750,000
CARES Act enhancements to a few and local taxes — including property for debt incurred after Dec. 15, 2017
deductions have been extended, and tax and the greater of income or sales ($500,000 and $375,000, respectively,
it’s possible more tax breaks could tax — is limited to $10,000 ($5,000 for separate filers), with some limited
be enhanced before year end. Proper if you’re married filing separately). exceptions.
timing of deductible expenses and Increasing or eliminating the limit has
taking advantage of other breaks can been discussed. Check with your tax Home equity debt interest deduction.
help maximize your tax savings. advisor for the latest information. Through 2025, the TCJA effectively
limits the home equity interest deduc-
Standard deduction vs. itemizing Deducting sales tax instead of income tion to debt that would qualify for the
Taxpayers can choose to either itemize tax may be beneficial if you reside in home mortgage interest deduction.
certain deductions or take the standard a state with no, or low, income tax or (Under pre-TCJA law, interest was
deduction based on their filing status. you purchased a major item, such as a deductible on up to $100,000 of home
Itemizing deductions when the total car or boat. equity debt used for any purpose, such
will be larger than the standard deduc- as to pay off credit card debt or to buy
tion saves tax, but it makes filing more a car.)
Home-related breaks
complicated. Consider both deductions and exclu- Home office deduction. If you’re an
sions in your tax planning: employee and work from home, under
The TCJA nearly doubled the stan-
dard deduction for each filing status. the TCJA, home office expenses
Property tax deduction. As noted aren’t deductible through 2025 —
Those amounts are to be annually earlier, unless proposed tax law changes
adjusted for inflation through 2025, even if your employer has required
come to fruition, through 2025 your you to work from home during the
after which they’re scheduled to property tax deduction is subject to
drop back to the amounts under pandemic. Why? For employees, this
the limit on deductions for state and is a miscellaneous itemized deduction
pre-TCJA law. (See Chart 1 for local taxes.
2021 amounts.) subject to the 2% of adjusted gross
income (AGI) floor, and the TCJA
suspended such deductions. (If you’re
CHART 1 2021 standard deduction self-employed, you may still be able
to deduct home office expenses. See
Filing status Standard deduction1 page 11.)
Singles and separate filers $12,550
Personal casualty and theft loss
Heads of households $18,800 deduction. Through 2025, the TCJA
Joint filers $25,100 suspends this itemized deduction
except if the loss was due to an
1
Taxpayers who are age 65 or older or blind can claim an additional standard deduction: $1,350 if
married, $1,700 if unmarried. event officially declared a disaster
by the President.
Income & Deductions 3
Rental income exclusion. If you rent
out all or a portion of your principal WHAT’S 2021 provides bigger charitable deduction
NEW!
residence or second home for less than opportunity for some taxpayers
15 days during the year, you don’t have
to report the income. But expenses Generally, donations to qualified charities are fully
directly associated with the rental, deductible — but only if you itemize deductions. For-
such as advertising and cleaning, won’t tunately, the CARES Act allowed taxpayers who claim
be deductible. the standard deduction to deduct up to $300 of cash
donations to qualified charities in 2020, and the CAA has
Home sale gain exclusion. When extended this break to 2021 — and increased the maxi-
you sell your principal residence, you mum deduction to $600 for married couples filing jointly.
can exclude up to $250,000 of gain
If itemizing no longer will save you tax because of the increased standard deduction,
($500,000 for married couples filing
you might benefit from “bunching” donations into alternating years so that your total
jointly) if you meet certain tests.
itemized deductions in those years would then surpass your standard deduction.
Warning: Gain that’s allocable to a
You can then itemize just in those years.
period of “nonqualified” use generally
isn’t excludable. For large donations, discuss with your tax advisor which assets to give and the
best ways to give them. For example, making large cash donations this year
Loss deduction. If you sell your home might be beneficial because the deduction limit for such gifts to public charities
at a loss and part of your home is is 100% of adjusted gross income (AGI) for 2021. This is a CAA one-year
rented out or used exclusively for your extension of a CARES Act provision that increased the normal 60% of AGI limit
business, the loss attributable to that to 100% for 2020.
portion may be deductible.
Moving expense deduction. Under Consider bunching elective medical an employer-determined limit — not
the TCJA, through 2025, work-related procedures (and any other services to exceed $2,750 in 2021. The plan
moving expenses are deductible only and purchases whose timing you can pays or reimburses you for qualified
by active-duty members of the Armed control without negatively affecting medical expenses. (If you have an
Forces (and their spouses or depen- your or your family’s health) into HSA, your FSA is limited to funding
dents) who move because of a military alternating years if it would help certain permitted expenses.) What
order that calls for a permanent you exceed the applicable floor and you don’t use by the plan year’s end,
change of station. (If you’re eligible, you’d have enough total itemized you generally lose — though your
you don’t have to itemize to claim deductions to benefit from itemizing. plan might give you a 2½-month
this deduction.) grace period to incur expenses to use
You may be able to save taxes without up the previous year’s contribution.
Tax-advantaged having to worry about the medical
saving for health care expense deduction floor by contribut- New! Your plan might allow you to
If medical expenses not paid via ing to one of these accounts: roll over all unused amounts to 2022
tax-advantaged accounts or reim- under the CAA.
bursable by insurance exceed a HSA. If you’re covered by a quali-
certain percentage of your AGI, fied high-deductible health plan, you More considerations
you can claim an itemized deduc- can contribute pretax income to an Keep in mind that legislation could
tion for the amount exceeding employer-sponsored Health Savings be signed into law that would suspend
that “floor.” Account — or make deductible or alter some of the TCJA provisions
contributions to an HSA you set up affecting deductions or make other
New! In late 2020, the 7.5% floor yourself — up to $3,600 for self-only changes to deduction rules. Check
(which had in recent years been coverage and $7,200 for family coverage with your tax advisor for the latest
a temporary reduction from 10%) (plus $1,000 if you’re age 55 or older) information.
was made permanent. for 2021. HSAs can bear interest or be
invested, growing tax-deferred similar Also be aware that there are other
Eligible expenses may include health to an IRA. Withdrawals for qualified types of taxes that could affect you
insurance premiums, long-term-care medical expenses are tax-free, and you and should be factored into your
insurance premiums (limits apply), can carry over a balance from year to planning, such as the alternative
medical and dental services, and year, allowing the account to grow. minimum tax (AMT). Your tax
prescription drugs. Mileage driven advisor can help you determine if
for health care purposes also can FSA. You can redirect pretax you’re among the small number of
be deducted — at 16 cents per mile income to an employer-sponsored taxpayers who still need to plan for
for 2021. Flexible Spending Account up to the AMT after the TCJA.
4 Family & Education
Bigger tax breaks for
parents and others this year
ecent tax law changes have the students provide more than half y Distributions used to pay the follow-
R temporarily expanded breaks
for parents and others with
of their own support from earned
income). Such income is generally
ing expenses are income-tax-free for
federal purposes and potentially also
dependents, as well as for taxpayers taxed at the parents’ tax rate. for state purposes, making the tax
with student loans. These are only some deferral a permanent savings:
of the many tax-savings opportunities 529 plans n Qualified postsecondary school
related to children and education, and If you’re saving for education expenses, expenses, such as tuition, man-
it’s important to take advantage of all consider a Section 529 plan. You can datory fees, books, supplies,
that are available to you. choose a prepaid tuition plan to secure computer equipment, software,
current tuition rates or a tax-advantaged Internet service and, generally,
Child, dependent savings plan to fund education expenses: room and board,
and adoption credits
n Elementary and secondary school
Under the TCJA, these two tax credits y Although contributions aren’t tuition of up to $10,000 per year
for families are available through 2025: deductible for federal purposes, any per student, and
growth is tax-deferred. (Some states
n Up to $10,000 of student loans
1. For each child under age 17 at the do offer tax breaks for contributing.)
end of the tax year, you may be per beneficiary.
able to claim a $2,000 credit. The
WHAT’S
credit phases out for higher-income Child and dependent care breaks expanded for 2021
NEW!
taxpayers (see Chart 2) but the
income ranges are much higher
than before the TCJA. This credit The ARPA temporarily enhances some valuable credits and deductions for families:
has been expanded for 2021. See
Child tax credit. The ARPA raises the eligibility age to under age 18 at the end
“What’s new!”
of 2021. It also increases the credit to $3,000 per child, and to $3,600 per child
under age 6 at the end of 2021. However, the increased credit amount ($1,000 or
2. For each qualifying dependent $1,600) is subject to lower income phaseouts. Contact your tax advisor for details.
other than a qualifying child
(such as a dependent child over Under the ARPA, taxpayers can receive advance payments (generally by direct
the age limit or a dependent deposit) equaling 50% of the IRS’s estimate of the taxpayer’s 2021 child tax
elderly parent), you may be able credit from July 2021 through December 2021.
to claim a $500 family credit. But
it’s also subject to the income- Child and dependent care tax credit. For children under age 13 or other
based phaseout. qualifying dependents, generally, a credit is available that equals 20% of the
first $3,000 of qualified expenses for one child or 20% of up to $6,000 of such
If you adopt in 2021, you may qualify expenses for two or more children. So, the maximum credit is usually $600 for
for the adoption credit — or for an one child or $1,200 for two or more children.
employer adoption assistance program
income exclusion. Both are $14,440 For 2021, the ARPA increases the credit to 50% of up to $8,000 in qualified
for 2021, but the credit is also subject expenses for one child and up to $16,000 for two or more children — so the
to an income-based phaseout. (See credit ultimately is worth up to $4,000 or $8,000. The credit is subject to an
Chart 2) income-based phaseout beginning at household income levels exceeding
$125,000, but not fully phasing out until $438,000.
“Kiddie tax” Child and dependent care FSA. Under the ARPA, for 2021, you can contribute up
The “kiddie tax” generally applies to to $10,500 (up from $5,000 for 2020) pretax to an employer-sponsored child and
unearned income beyond $2,200 (for dependent care Flexible Spending Account. The plan pays or reimburses you for
2021) of children under age 19 and of these expenses. You can’t claim a tax credit for expenses reimbursed through an FSA.
full-time students under age 24 (unless
Family & Education 5
y The plans usually offer high con-
tribution limits, and there are no CHART 2 2021 child and education breaks1:
income limits for contributing. Are you subject to a phaseout?
y There’s generally no beneficiary Tax break Modified adjusted gross income phaseout range
age limit for contributions or
Single / Head of household2 Married filing jointly
distributions.
Child credit 3
$ 200,000 – $ 240,000 $ 400,000 – $ 440,000
y You can control the account, even
after the child is of legal age. Adoption credit $ 216,660 – $ 256,660 $ 216,660 – $ 256,660
y You can make tax-free rollovers to ESA contribution $ 95,000 – $ 110,000 $ 190,000 – $ 220,000
another qualifying family member. American
$ 80,000 – $ 90,000 $ 160,000 – $ 180,000
Opportunity credit
y A special break for 529 plans allows
you to front-load five years’ worth of Lifetime Learning credit $ 80,000 – $ 90,000 $ 160,000 – $ 180,000
annual gift tax exclusions and make Student loan
$ 70,000 – $ 85,000 $ 140,000 – $ 170,000
up to a $75,000 contribution (or interest deduction
$150,000 if you split the gift with Assumes one child or student. Amounts may vary for more than one child or student. Other rules
1
your spouse) per beneficiary in 2021. and limits might reduce the break.
These ranges also apply to married taxpayers filing separately, except that separate filers aren’t
2
The biggest downside of 529 plans may eligible for the American Opportunity or Lifetime Learning credit or the student loan interest
be that your investment options — deduction.
and when you can change them — are A lower income phaseout range applies to the additional child credit amount available under the
3
ARPA. Contact your tax advisor for details.
limited.
ESAs for beneficiaries under age 18. When New! If your employer pays some
Coverdell Education Savings Accounts the beneficiary turns age 30, the ESA of your student loan debt, you may
are similar to 529 savings plans in generally must be distributed, and any be eligible to exclude up to $5,250
that contributions aren’t deductible earnings may be subject to tax and a from income. This break was created
for federal purposes, but plan assets 10% penalty. by the CARES Act and extended
can grow tax-deferred and distribu- through 2025 by the CAA. Student
tions used to pay qualified education Education credits loan interest payments for which
expenses are income-tax-free. ESAs If you have children in college now or the exclusion is allowable can’t be
are worth considering if you’d like to are currently in school yourself, you deducted.
have direct control over how your may be eligible for a credit:
contributions are invested or you want New! The ARPA requires the tax-
to pay elementary or secondary school American Opportunity credit. This free treatment of student loan debt
expenses in excess of $10,000 or that tax break covers 100% of the first forgiven between Dec. 31, 2020, and
aren’t tuition. $2,000 of tuition and related expenses Jan. 1, 2026. (Forgiven debt typically
and 25% of the next $2,000 of is treated as taxable income.)
But the $2,000 contribution limit expenses. The maximum credit, per
is low, and it’s phased out based on student, is $2,500 per year for the first ABLE accounts
income. (See Chart 2.) Also, contri- four years of post-secondary education. Achieving a Better Life Experience
butions can generally be made only accounts offer a tax-advantaged way
Lifetime Learning credit. If you’re pay- to fund qualified disability expenses
ing postsecondary education expenses for a beneficiary who became blind
beyond the first four years, you may or disabled before age 26. For federal
benefit from the Lifetime Learning purposes, tax treatment is similar to
credit (up to $2,000 per tax return). that of Sec. 529 college savings plans.
Warning: Income-based phaseouts Under the TCJA, through 2025,
apply to these credits. (See Chart 2.) 529 plan funds can be rolled over
If your income is too high for you to to an ABLE account without penalty
qualify, your child might be eligible. if the ABLE account is owned by
the beneficiary of the 529 plan or a
Student loan breaks member of the beneficiary’s family.
If you’re paying off student loans, you Such rolled-over amounts count
may be able to deduct up to $2,500 of toward the ABLE account annual
interest (per tax return). An income- rollover and contribution limit
based phaseout applies. (See Chart 2.) ($15,000 for 2021).
6 Investing
Factoring taxes into
your investment planning
or at least the first half of 2021, The long-term gains rate applies to you paid for it. So while it’s distressing
F the stock market has generally
been on an upward trend.
investments held for more than 12
months. The rate varies depending
to see an account statement that shows
a large loss, the loss won’t affect your
But economic, political and pandemic on your income and the type of assets. current tax situation as long as you still
uncertainty could cause volatility to (See Chart 3.) own the investment.
resume. Such uncertainty also makes tax
planning for investments challenging. Under the TCJA, current rates are Realized capital losses are netted against
There are many other factors to evaluate scheduled to be in effect through 2025. realized capital gains to determine
before deciding whether to sell or hold Lawmakers could, however, make capital gains tax liability. If net losses
an investment, such as investment goals, changes to the rates sooner. Be aware exceed net gains, you can deduct only
time horizon, risk tolerance, factors that taxing long-term gains of the $3,000 ($1,500 for married taxpayers
related to the investment itself, fees and highest-income taxpayers at their filing separately) of losses per year
charges that apply to buying and selling ordinary-income rate has been proposed. against ordinary income (such as wages,
securities, and your need for cash. But self-employment and business income,
taxes are still important to consider. Holding on to an investment until interest, dividends, and taxable retire-
you’ve owned it more than one year ment plan distributions). But you can
Capital gains tax and timing may help substantially cut tax on carry forward excess losses until death.
Although time, not timing, is gener- any gain. But be sure to look at your
ally the key to long-term investment specific situation, and keep an eye If you don’t have enough gains to absorb
success, timing can have a dramatic out for possible tax law changes. losses, you could be left with losses in
impact on the tax consequences of excess of the annual ordinary-income
investment activities. Your marginal Being tax-smart with losses deduction limit. So think twice before
long-term capital gains rate can be as Losses aren’t truly losses until they’re selling an investment at a loss. After
much as 20 percentage points lower realized — that is, generally until you all, if you hold on to the investment,
than your ordinary-income tax rate. sell the investment for less than what it may recover the lost value. In fact,
a buy-and-hold strategy works well for
many long-term investors because it can
CHART 3 What’s the maximum 2021 capital gains tax rate? minimize the effects of market volatility.
Type of gain Rate1 Of course, an investment might con-
Taxpayer’s ordinary- tinue to lose value. That’s one reason
Short-term (assets held 12 months or less)
income tax rate why tax considerations shouldn’t be the
Long-term (assets held more than 12 months) 15% primary driver of investment decisions. If
you’re ready to divest yourself of a poorly
Some key exceptions performing stock because, for example,
Long-term gain of certain higher-income taxpayers 20%2 you don’t think its performance will
improve or your investment objective
Most long-term gain that would be taxed at 10% or 12%
based on the taxpayer’s ordinary-income rate
0% or risk tolerance has changed, don’t
hesitate solely for tax reasons.
Long-term gain on collectibles, such as artwork and antiques 28%
Long-term gain attributable to certain recapture of prior
25%
Plus, building up losses for future
depreciation on real property use could be beneficial. This may
1
In addition, the 3.8% net investment income tax (NIIT) applies to net investment income to the be especially true if you have a large
extent that modified adjusted gross income (MAGI) exceeds $200,000 (singles and heads of investment portfolio, real estate
households), $250,000 (married filing jointly) or $125,000 (married filing separately).
holdings or a closely held business
2
The 20% rate applies only to those with taxable income exceeding $445,850 (singles), $473,750
(heads of households), $501,600 (joint filers) or $250,800 (separate filers). that might generate substantial
future gains, or if tax rates increase.
Investing 7
Mutual funds
Mutual funds with high turnover
CASE Year-end mutual fund capital gains
STUDY 1
rates can create income that’s taxed distributions can lead to tax surprises
at ordinary-income rates. Choosing
funds that provide primarily long-
term gains can save you more tax
dollars because of the lower long-
term rates.
Also pay attention to earnings
reinvestments. Unless you or your
investment advisor increases your
basis accordingly, you may report
more gain than required when you
sell the fund. Brokerage firms are
required to track (and report to the
IRS) your cost basis in mutual funds
acquired in recent years.
Selena purchases 200 shares of an equity mutual fund on December 1 at $100
Finally, beware of buying equity
per share, for a total investment of $20,000. The next week, the fund makes a
mutual fund shares late in the year. capital gains distribution of $15 per share.
See Case Study 1 to learn why.
Selena ends up with capital gains of $3,000, reportable on her tax return for the
Income investments year of the distribution. It doesn’t matter whether the actual value of the shares
Some types of investments produce has increased or even decreased since Selena purchased them, or whether she
income in the form of dividends or reinvests the proceeds back into the same fund.
interest. Here are some tax conse- Why? The distribution itself is a taxable event. If capital gains distributions from
quences to consider: the mutual fund are reinvested in the fund, the distribution itself doesn’t change
Selena’s value in the fund. It simply increases the number of shares she owns,
Dividend-producing investments. yet now at a lower per-share value.
Qualified dividends are taxed at the
favorable long-term capital gains
tax rate rather than at your higher y Interest on state and local gov- 3.8% NIIT
ordinary-income tax rate. But if ernment bonds is excludable Taxpayers with modified adjusted
long-term gains of the highest-income on federal returns. If the bonds gross income (MAGI) over $200,000
taxpayers begin being taxed at their were issued in your home state, ($250,000 if married filing jointly and
ordinary-income rate, as has been interest also may be excludable $125,000 if married filing separately)
proposed, this would likely also apply on your state return. may owe the net investment income
to the taxation of qualified dividends y Tax-exempt interest from certain tax, in addition to other taxes already
of these taxpayers. private-activity municipal bonds discussed here. The NIIT equals 3.8%
can trigger or increase the alter- of the lesser of your net investment
Interest-producing investments. native minimum tax (AMT), income or the amount by which your
Interest income generally is taxed but the AMT now occurs much MAGI exceeds the applicable thresh-
at ordinary-income rates. So stocks more rarely. old. Net investment income can include
that pay qualified dividends may be capital gains, dividends, interest, passive
more attractive taxwise than other y Corporate bond interest is business income, rental income and
income investments, such as CDs taxable for federal and state other investment-related income (but
and taxable bonds. But also consider purposes. not business or self-rental income from
nontax issues, such as investment y Bonds (except U.S. savings bonds) an active trade or business).
risk, rate of return and diversification. with original issue discount build
up “interest” as they rise toward Many of the strategies that can help
Bonds. These also produce interest maturity. You’re generally con- you save or defer income tax on your
income, but the tax treatment varies: sidered to earn a portion of that investments can also help you avoid
interest annually — even though or defer NIIT liability. And because
y Interest on U.S. government bonds the bonds don’t pay this interest the threshold for the NIIT is based
is taxable on federal returns but annually — and you must pay on MAGI, strategies that reduce your
exempt by federal law on state and tax on it. MAGI could also help you avoid or
local returns. reduce NIIT liability.
8 Business
How businesses can
maximize their tax savings
his year some businesses are 20% of qualified business income (QBI), To reiterate, none of these limits apply
T thriving while others are still
struggling to recover from the
not to exceed 20% of taxable income.
QBI is generally defined as the net
if your taxable income is under the
applicable threshold.
pandemic and resulting economic cri- amount of qualified items of income,
sis. Whatever your business’s situation, gain, deduction and loss that are Projecting income
taking full advantage of available tax connected with the conduct of a U.S. Projecting your business’s income
breaks — including temporary relief in business. for this year and next can allow you
response to the crisis — is critical. And to time income and deductions to
changes under the TCJA still demand Additional limits begin to apply if your advantage. It’s generally — but
attention, too. 2021 taxable income exceeds the not always — better to defer tax, so
applicable threshold — $164,900 consider:
Business structure or, if married filing jointly, $329,800
Income taxation and owner liability ($164,925 if married filing separately). Deferring income to next year. If
are the main factors that differentiate The limits fully apply when 2021 your business uses the cash method of
business structures. Many owners choose taxable income exceeds $214,900 and accounting, you can defer billing for
entities that combine pass-through $429,800 ($214,925), respectively. products or services at year end. If you
taxation with limited liability, namely use the accrual method, you can delay
limited liability companies (LLCs) and One such limit is that the 199A shipping products or delivering services.
S corporations. deduction generally can’t exceed
the greater of the owner’s share of: Accelerating deductible expenses
The TCJA significantly changed the into the current year. If you’re a
tax consequences of business struc- y 50% of the amount of W-2 wages cash-basis taxpayer, you may pay
ture. The now-flat corporate rate paid to employees by the qualified business expenses by Dec. 31, so you
(21%) is substantially lower than the business during the tax year, or can deduct them this year rather than
top individual rate (37%), providing y The sum of 25% of W-2 wages next. Both cash- and accrual-basis
sizable tax benefits to C corporations plus 2.5% of the cost of qualified taxpayers can charge expenses on a
and mitigating the impact of double property. credit card and deduct them in the
taxation on owners. But, the TCJA year charged, regardless of when the
also introduced a powerful deduction Another is that the 199A deduction credit card bill is paid.
for owners of pass-through entities. generally isn’t available for income
(See below.) from “specified service businesses.” Warning: Don’t let tax considerations
Examples include businesses that get in the way of sound business
Depending on your situation, a structure provide investment-type services and decisions. For example, the negative
change may sound like a good idea. But most professional practices (other impact on your cash flow or customers
keep in mind that increases to both the than engineering and architecture). may not be worth the tax benefit.
corporate rate and the top individual
rate have been proposed. Even if there
are no tax increases, a change could
CHART 4 2021 income tax differences
have unwelcome tax consequences. based on business structure
Consult your tax advisor if you’d like Pass-through entity
to explore whether a structure change or sole proprietorship C corporation
could benefit you.
Two levels of taxation: The business is
One level of taxation: The business’s
taxed on income, and then shareholders
199A deduction for income passes through to the owner(s).
are taxed on any dividends they receive.
pass-through businesses
Losses flow through to the owner(s). Losses remain at the corporate level.
Through 2025, the TCJA provides the
The top individual tax rate is 37%, but,
Section 199A deduction for sole pro- The flat corporate tax rate is 21%, and
for eligible taxpayers, up to 20% of
prietorships and owners of pass-through qualified business income is deductible.
the top rate on qualified dividends is 20%.
entities. The deduction generally equalsBusiness 9
Taking the opposite approach. If your
business is a pass-through entity and it’s CASE Reaping the benefits of bonus
STUDY 2
likely you’ll be in a higher tax bracket depreciation on QIP investments
next year, accelerating income and
deferring deductible expenses may save Taylor owns a specialty housewares store and, with Americans spending more
you more tax over the two-year period. on their homes during the pandemic, business remained surprisingly good in
2020 and has been picking up in 2021. So the retailer is considering making
some improvements to the store this year.
Depreciation
For assets with a useful life of more Taylor is wondering what tax breaks would be available. Store improvements made
than one year, you generally must in 2018 didn’t provide much of a tax benefit due to a technical error in the TCJA.
depreciate the cost over a period of
years. In most cases, the Modified The TCJA classified qualified retail-improvement, restaurant and leasehold-
improvement property as qualified improvement property (QIP). Congress
Accelerated Cost Recovery System
intended QIP placed in service after 2017 to have a 15-year MACRS recovery
(MACRS) will be preferable to other
period and, in turn, qualify for 100% bonus depreciation. (See “Bonus
methods because you’ll get larger
depreciation” below.) But, the statutory language didn’t define QIP as 15-year
deductions in the early years of an
property, so QIP defaulted to a 39-year recovery period, making it ineligible
asset’s life. for bonus depreciation.
But if you make more than 40% of Taylor consults a tax advisor, who shares some good news: The CARES Act
the year’s asset purchases in the last included a technical correction to fix the QIP drafting error. Retailers like Taylor
quarter, you could be subject to the as well as other businesses that have made qualified improvements during the
typically less favorable midquarter past three years can claim an immediate tax refund for the bonus depreciation
convention. Careful planning can they missed. Businesses investing in QIP in 2021 and beyond also can claim
help you maximize depreciation bonus depreciation going forward, according to the phaseout schedule.
deductions in the year of purchase.
So, not only can Taylor’s 2021 store improvements potentially qualify for 100%
bonus depreciation, but the retailer’s tax advisor can file an amended tax return
Other depreciation-related breaks and
for 2018 and Taylor can receive a refund for bonus depreciation related to the
strategies may be available:
2018 store improvements.
Section 179 expensing election. This
allows you to currently deduct the film, television and live theatrical Even if you prefer to buy a smaller
cost of purchasing eligible new or used productions. For qualified assets placed vehicle, you can still potentially
assets, such as equipment, furniture, in service through Dec. 31, 2022, enjoy a valuable first-year deduction.
off-the-shelf computer software, qual- bonus depreciation is 100%. For 2023 Vehicles rated at 6,000 pounds or
ified improvement property, certain through 2026, bonus depreciation is less are subject to the passenger vehi-
depreciable tangible personal property scheduled to be gradually reduced. cle limits; contact your tax advisor
used predominantly to furnish lodging, For certain property with longer pro- for details.
and the following improvements to duction periods, these reductions are
nonresidential real property: roofs, delayed by one year. If you use a vehicle for business and
HVAC equipment, fire protection and personal purposes, the associated
alarm systems, and security systems. New! Qualified improvement property expenses, including depreciation,
is now eligible for bonus depreciation. must be allocated between deductible
For qualifying property placed in (See Case Study 2.) business use and nondeductible
service in 2021, the expensing limit personal use. Warning: If business
is $1.05 million. The break begins Warning: Under the TCJA, in some use is 50% or less, you won’t be able
to phase out dollar for dollar when cases a business may not be eligible for to use Sec. 179 expensing or the
asset acquisitions for the year exceed bonus depreciation. Contact your tax accelerated regular MACRS; you’ll
$2.62 million. advisor for details. have to use the straight-line method.
Bonus depreciation. This additional Vehicle-related depreciation Meals, entertainment
first-year depreciation is available Vehicle purchases may be eligible and transportation
for qualified assets, which include for Sec. 179 expensing, and buying The TCJA changed some of the rules
new tangible property with a recov- a large truck or SUV can maximize related to meal, entertainment and
ery period of 20 years or less (such the deduction. The normal Sec. 179 transportation expenses. Here’s a
as office furniture and equipment), expensing limit (see above) generally closer look at what’s deductible and
off-the-shelf computer software, and applies to vehicles with a gross vehicle what’s not:
water utility property. weight rating of more than 14,000
pounds. A $26,200 limit applies to Meals. Under the TCJA, business-
Under the TCJA, through Dec. 31, vehicles (typically SUVs) rated at related meal expenses, including
2026, the definition has been expanded more than 6,000 pounds, but no more those incurred while traveling on
to include used property and qualified than 14,000 pounds. business, remain 50% deductible.10 Business
But, the TCJA expanded the 50% A Health Reimbursement Account also avoid payroll taxes. Examples are
disallowance rule to meals provided reimburses an employee for medical employee discounts, group term-life
via an on-premises cafeteria or expenses up to a maximum dollar insurance (up to $50,000 per person)
otherwise on the employer’s premi- amount. Unlike an HSA, no HDHP and health insurance.
ses for the convenience of the is required. Unlike an FSA (other
employer. (Such meals used to be than when an exception applies), Warning: You might be penalized for
100% deductible.) any unused portion can be carried not offering health insurance. The
forward to the next year. But only the Affordable Care Act can in some
New! The CAA generally increases employer can contribute to an HRA. cases impose a penalty on “large”
the deduction to 100% for food and employers if they don’t offer full-
beverages provided by a restaurant Fringe benefits. Certain fringe benefits time employees “minimum essential
in 2021 or 2022. aren’t included in employee income, coverage” or if the coverage offered
yet the employer can still deduct the is “unaffordable” or doesn’t provide
Entertainment. Under the TCJA, portion, if any, that it pays and typically “minimum value.”
these expenses are no longer
deductible.
WHAT’S Some COVID-19 tax relief still
Transportation. Employer deductions NEW!
available for employers in 2021
for providing commuting transpor-
tation (such as hiring a car service) To help employers retain their workforces and provide paid leave during the
aren’t allowed under the TCJA, unless pandemic, legislation signed into law in 2020 offered some tax relief. Much of
the transportation is necessary for this relief has been extended into 2021 and, in some cases, it’s been expanded.
the employee’s safety. The TCJA also Keep in mind that additional rules and limits apply, and there could be more
eliminated employer deductions for changes to these breaks. Check with your tax advisor for the latest information.
qualified employee transportation
fringe benefits (for example, parking Employee retention credit. The CARES Act created this credit for employers
allowances, mass transit passes and whose operations were fully or partially suspended because of a COVID-19-related
van pooling). But, those benefits are governmental shutdown order or whose gross receipts dropped more than 50%
still tax-free to recipient employees. compared to the same quarter in the previous year (until gross receipts exceed
Transportation expenses for business 80% of gross receipts in the earlier quarter).
travel are still 100% deductible, pro-
vided they meet the applicable rules. Employers whose workforces exceeded 100 employees could claim the credit
for employees who’d been furloughed or had their hours reduced because of the
Employee benefits reasons noted. If an employer had 100 or fewer employees, it could qualify for
the credit regardless of whether there had been furloughs or hour reductions.
Offering a variety of benefits not only
can help you attract and retain the The credit equaled 50% of up to a ceiling of $10,000 in annual compensation,
best employees, but also may save tax including health care benefits, paid to an eligible employee after March 12, 2020,
because you generally can deduct your through Dec. 31, 2020.
contributions:
The CAA extended the credit through June 30, 2021, and for those quarters
Qualified deferred compensation increased the credit to 70% of compensation and the ceiling to $10,000 per
plans. These include pension, profit- quarter. It also reduced the gross receipts threshold to a 20% drop, and
sharing, SEP and 401(k) plans, as well increased the threshold for a “large” employer to more than 500 employees.
as SIMPLEs. (For information on the The ARPA extended the expanded credit through Dec. 31, 2021, but ending it
benefits to employees, see page 12.) sooner has been proposed. Check with your tax advisor for the latest information.
Certain small employers may also be
eligible for a tax credit when setting Paid leave credit. The Families First Coronavirus Response Act generally
up a retirement plan. required employers with fewer than 500 employees to provide paid leave in
certain COVID-19-related situations in 2020. Covered employers generally
HSAs, FSAs and HRAs. If you could take a federal payroll tax credit for 100% of the qualified sick and family
provide employees with a qualified leave wages they pay each quarter, up to $511 per day for leave taken for the
high-deductible health plan (HDHP), employee’s own illness or quarantine and $200 for leave taken to care for
you can also offer them Health others. The ARPA extended the credit through Sept. 30, 2021.
Savings Accounts. (See page 3.)
Warning: Payroll tax deferral available in 2020 has not been extended to 2021.
Regardless of the type of health
Under the CARES Act, the first half of any deferred 2020 employer share (6.2% of
insurance you provide, you can offer
wages) of Social Security tax is due by Dec. 31, 2021, and the second half is due
Flexible Spending Accounts for
by Dec. 31, 2022. Under the CAA, any 2020 employee share (also 6.2% of wages)
health care. (See page 3. You can also
of Social Security tax deferred under the Aug. 8, 2020, presidential memorandum
offer FSAs for child and dependent
must be withheld from employee pay and paid on a prorated basis over 2021.
care. See page 4.)Business 11
Tax credits
Tax credits reduce tax liability dollar
WHAT’S Interest-expense and loss deductions
NEW!
for dollar, making them particularly return to pre-CARES Act rules
beneficial:
The CARES Act temporarily eased TCJA rules
for certain deductions, but the relief hasn’t been
Research credit. This credit gives
extended to 2021:
businesses an incentive to increase
their investments in research. Certain Interest expense deduction. Generally, under
start-ups (in general, those with less the TCJA, interest paid or accrued by a business
than $5 million in gross receipts) can, is deductible only up to 30% of adjusted taxable
alternatively, use the credit against income (ATI). Taxpayers with average annual gross
their payroll tax. While the credit receipts of $25 million or less for the three previous
is complicated to compute, the tax tax years generally are exempt from the limitation. Some other taxpayers are also
savings can prove significant. exempt — check with your tax advisor for more information.
Work Opportunity credit. This credit The CARES Act generally increased the interest expense deduction limit to 50%
is designed to encourage hiring from of ATI for the 2019 and 2020 tax years.
various disadvantaged groups, such as
certain veterans, ex-felons, the long- The TCJA’s 30% deduction limit and other rules return for 2021.
term unemployed and food stamp
Loss deductions. A loss occurs when a business’s expenses and other deduc-
recipients. The maximum credit is
tions for the year exceed its revenue:
generally $2,400 per hire but can be
higher in some cases — up to $9,600 1. Net operating losses (NOLs). The TCJA generally reduces the amount of
for certain veterans, for example. taxable income that can be offset with NOL deductions from 100% to 80%. It
New! The CAA has extended this also generally prohibits NOLs from being carried back to an earlier tax year —
credit through Dec. 31, 2025. but allows them to be carried forward indefinitely (as opposed to the previous
20-year limit).
New Markets credit. This gives
investors who make “qualified equity Under the CARES Act, taxpayers could carry back NOLs arising in 2018
investments” in certain low-income com- through 2020 tax years to the previous five tax years. The CARES Act also
munities a 39% credit over a seven-year allowed taxpayers to potentially claim an NOL deduction equal to 100% of
period. New! The CAA has extended taxable income for prior-year NOLs carried forward into tax years beginning
this credit through Dec. 31, 2025. before 2021.
Family and medical leave credit. The TCJA’s 80% of taxable income deduction limit and prohibition of carrybacks
The TCJA created a tax credit for generally return for NOLs arising in 2021 or later.
qualifying employers that begin
2. Pass-through entity “excess” business losses. Through 2025, the TCJA
providing paid family and medical
applies a limit to deductions for current-year business losses incurred by non-
leave to their employees. The credit
corporate taxpayers: Such losses generally can’t offset more than $250,000
is equal to a minimum of 12.5% of
($500,000 for married couples filing jointly) of income from other sources,
the employee’s wages paid during that
such as salary, self-employment income, interest, dividends and capital gains.
leave (up to 12 weeks per year) and
(The limit is annually adjusted for inflation.) “Excess” losses are carried forward
can be as much as 25% of wages paid.
to later tax years and can then be deducted under the NOL rules.
New! The CAA has extended this
credit through Dec. 31, 2025. The CARES Act temporarily lifted the limit, allowing taxpayers to deduct 100%
of business losses arising in 2018, 2019 and 2020.
Additional rules and limits apply to
these credits, and expiring credits Not only does the deduction limit return for 2021, but the ARPA has extended
might be extended. Other credits may it through 2026.
also be available to you. Check with
your tax advisor for more information.
In addition, you can deduct 100% of If your home office is your principal
The self-employed health insurance costs for yourself, and place of business (or used substantially
If you’re self-employed, you have to for a spouse and children, too. This and regularly to conduct business)
pay both the employee and employer above-the-line deduction is limited to and that’s the only use of the space,
portions of employment taxes on net self-employment income. You also you probably can deduct home office
self-employment income. The employer can take an above-the-line deduction expenses from your self-employment
portion is deductible “above the line,” for contributions to a retirement plan income.
which means you don’t have to itemize (see page 12) and, if eligible, an HSA
to claim the deduction. (see page 3) for yourself.12 Retirement
Whatever your age, it pays to think about
how taxes fit into retirement planning
hich type of plan should you as an employee. You might not have Roth conversions. If you have a tradi-
W invest in? When should you
start taking distributions?
to make 2021 contributions, or even
set up the plan, before year end.
tional IRA, a partial or full conversion
to a Roth IRA can allow you to turn
What are the tax consequences? tax-deferred future growth into tax-free
Whether you’re just starting to think Your employer doesn’t offer a retire- growth and take advantage of a Roth
about retirement planning, are retired ment plan. Consider a traditional IRA. IRA’s estate planning benefits. The
already, or are somewhere in between, You can likely deduct your contribu- converted amount is taxable in the
addressing the relevant questions will tions, though your deduction may be year of the conversion. Discuss with
help ensure your golden years are limited if your spouse participates in your tax advisor whether a conversion
truly golden. an employer-sponsored plan. You can makes sense for you.
make 2021 contributions until the
401(k)s and other employer plans 2021 income-tax-return-filing deadline “Back door” Roth IRA contributions.
Contributing to a traditional employer- for individuals, not including exten- If your income is too high to make
sponsored defined contribution plan is sions. (See Chart 5 for the annual Roth IRA contributions and you don’t
usually a good first step: contribution limits.) have a traditional IRA, consider setting
up a traditional account and making
y Contributions are typically pretax, Roth alternatives a nondeductible contribution to it.
reducing your taxable income. A potential downside of tax-deferred You can then immediately convert the
saving is that you’ll have to pay taxes contributed amount to a Roth account
y Plan assets can grow tax-deferred — with minimal tax impact.
when you make withdrawals at retire-
meaning you pay no income tax until
ment. Roth plans, however, allow
you take distributions. Roth 401(k), Roth 403(b) and
tax-free distributions; the tradeoff is
y Your employer may match some or that your contributions don’t reduce Roth 457 plans. Employers may
all of your contributions. your current-year taxable income: offer one of these in addition to the
traditional, tax-deferred version.
Chart 5 shows the 2021 employee No income-based phaseout applies,
Roth IRAs. An income-based
contribution limits. Because of tax- so even high-income taxpayers can
phaseout may reduce or eliminate
deferred compounding, increasing contribute.
your ability to contribute. But estate
your contributions sooner rather
planning advantages are an added
than later can have a significant Early withdrawals
benefit: Unlike other retirement
impact on the size of your nest egg
plans, Roth IRAs don’t require you to Early withdrawals from retirement
at retirement. Employees age 50
take distributions during your lifetime, plans should be a last resort. With a
or older can also make “catch-up”
so you can let the entire balance grow few exceptions, distributions before
contributions. If your employer offers
tax-free for the benefit of your heirs. age 59½ are subject to a 10% penalty
a match, at minimum contribute the
amount necessary to get the maximum
match so you don’t miss out on that CHART 5 Retirement plan contribution limits for 2021
“free” money.
Regular contribution Catch-up contribution1
More tax-deferred options
Traditional and Roth IRAs $ 6,000 $ 1,000
In certain situations, other tax-deferred
saving options may be available: 401(k)s, 403(b)s,
$ 19,500 $ 6,500
457s and SARSEPs2
You’re a business owner or self- SIMPLEs $ 13,500 $ 3,000
employed. You may be able to set up For taxpayers age 50 or older by the end of the tax year.
1
a plan that allows you to make much Includes Roth versions where applicable.
2
larger contributions than you could Note: Other factors may further limit your maximum contribution.
make to an employer-sponsored planRetirement 13
on top of any income tax that ordi-
narily would be due on a withdrawal. WHAT’S Taking advantage of tax breaks
NEW!
Additionally, you’ll lose the potential on COVID-19 distributions
tax-deferred future growth on the
withdrawn amount. In response to the COVID-19
crisis, the CARES Act waived the
If you must make an early withdrawal 10% early withdrawal penalty —
and you have a Roth account, consider along with providing additional
withdrawing from that. You can with- tax advantages that taxpayers age
draw up to your contribution amount 59½ and older can also benefit
without incurring taxes or penalties. from — on COVID-19-related dis-
tributions up to $100,000. These
Another option: If your employer- generally were 2020 withdrawals
sponsored plan allows it, take a plan made by someone who had
loan. You’ll have to pay it back with been (or whose family had been)
interest and make regular principal infected with COVID-19 or who
payments, but you won’t be subject to had been economically harmed
current taxes or penalties. (You can’t by the virus.
borrow from an IRA.)
If you took an eligible 2020 distribution, consider these tax-deferral options:
Early distribution rules also become Recontribute the distributions. Normally once you’ve taken a retirement
important if you change jobs or retire. plan distribution, you have only 60 days to return it to the plan. But the CARES
It’s usually best to request a direct Act created an exception for eligible COVID-19 distributions: They may be
rollover from your old plan to your recontributed over the three-year period starting the day after the withdrawal.
new plan or IRA. If you receive a
lump sum payout, you’ll need to make If you can afford to do so, this is likely the best option. You can avoid current
an indirect rollover within 60 days tax liability, and the funds can return to growing tax deferred, building up your
to avoid tax and potential penalties. retirement nest egg. Depending on when you recontribute, you may have to
initially pay some tax and then file an amended return after the recontribution
RMDs to get that tax back.
Historically, after reaching age 70½,
Spread out the income tax payments. Generally, tax on distributions is due by
taxpayers have had to begin taking
the filing deadline for the year the distribution was taken. But under the CARES
annual required minimum distributions
Act, you can spread out the reporting of eligible COVID-19 distributions over
from their IRAs (except Roth IRAs)
2020, 2021 and 2022.
and, generally, from any defined con-
tribution plans. However, the age has If you can’t afford to recontribute the distribution, this option might be beneficial —
increased to 72 for taxpayers who didn’t though if your 2020 tax bracket is lower than usual, you may be better off reporting
turn age 70½ before Jan. 1, 2020 (that the entire distribution on your 2020 return. Also, you still have the option to return
is, who were born after June 30, 1949). some or all of the distribution up until the end of the three-year period; you’ll just
need to file one or more amended returns to get the tax refunded.
If you don’t comply with RMD rules,
you can owe a penalty equal to 50% of The rules are complex, so be sure to consult your tax advisor.
the amount you should have withdrawn
but didn’t. You can avoid the RMD rule
for a non-IRA Roth plan by rolling the Security payments to become taxable, IRA donations to charity
funds into a Roth IRA. 2) increase income-based Medicare Taxpayers age 70½ or older are
premiums and prescription drug allowed to make direct contributions
Warning: The RMD waiver available charges, or 3) affect tax breaks with from their IRA to qualified charitable
in 2020 hasn’t been extended to 2021. income-based limits. organizations up to $100,000 per tax
year. A charitable deduction can’t
Waiting as long as possible to take If you’ve inherited a retirement plan, be claimed for the contributions.
distributions generally is advantageous consult your tax advisor about the But the amounts aren’t included in
because of tax-deferred compounding. distribution rules that apply to you. taxable income and can be used to
But a distribution (or larger distribu- satisfy an IRA owner’s RMD. A direct
tion) in a year your tax bracket is low Warning: The time period for distribu- contribution might be tax-smart if
may save tax. Be sure, however, to tions has been reduced to 10 years for you won’t benefit from the charitable
consider the lost future tax-deferred beneficiaries — other than surviving deduction. (See “What’s new!” on
growth and, if applicable, whether spouses and certain others — inheriting page 3.)
the distribution could: 1) cause Social plans after Dec. 31, 2019.You can also read
