The 2021 tax filing season is upon us and officially opens up for business on January 24th, 2022, which means all personal tax returns and extension requests must be submitted by April 18th, 2022 to avoid any penalties. With the deadline fast approaching, there is little time left to make any decisions around your tax picture for the year. Chances are, you may not even be aware of some of the tools at your disposal, so in this article, we cover five last-minute tax tips to take advantage of for your 2021 tax picture.
1. Make retirement contributions
For many types of retirement accounts, the deadline to make 2021 contributions is April 18th, 2022, or October 17th, 2022 if you file a timely extension. The types of retirement accounts that allow for contributions up until these dates include:
- Traditional IRAs
- Roth IRAs
- Simplified Employee Pension IRAs (SEP IRAs) (if self-employed)
- Solo 401(k)s (if self-employed)
The contribution limits for Traditional and Roth IRAs are $6,000 for 2021 if you are under the age of 50, or $7,000 if you are over the age of 50. If you are also under the income limits for 2021, you can take a full tax deduction for contributions made to a Traditional IRA. Roth IRA contributions, on the other hand, do not reduce your taxable income but benefit from tax-free growth and tax-free withdrawals in the future.
If you are self-employed and have a SEP IRA in place, you can contribute up to 25% of your net self-employment income for 2021. Fidelity has an easy contribution worksheet to help you calculate what this amount is if you are doing so on your own. If you are a sole proprietor, single-member LLC, or C corporation, your deadline for contributions is April 18th, 2022 without an extension, or October 17th with an extension. If you are taxed as an S corporation or a partnership LLC, your deadline is March 15th, 2022 without an extension, or September 15th, 2022 with an extension.
For Solo 401(k)’s, your contribution deadlines are the same as SEP IRAs, depending on the tax filing structure of your business with a few different nuances that we cover below. But first, the Solo 401(k) contribution limits for 2021 are:
- Employee Elective Deferral (Pre-Tax and/or Roth) – $19,500 if under age 50, or $26,000 if over age 50.
- Profit-Sharing Contribution (Pre-Tax Only) – 25% of your W-2 wage (if S Corp), or 20% of your net adjusted business income (NABI = Net Business Income – ½ of Self-Employment Tax).
- After-Tax Contributions (if the plan allows) – Whatever dollar amount is left up to $58,000 if you are under age 50, or $64,500 if you are over age 50 after subtracting your employee elective deferral and profit-sharing contributions.
If you are taxed as an S Corporation, your employee elective deferrals must be deducted from your W-2 wage for the year. Since your W-2 must be filed by January 31st, 2022, you must record the contribution on your W-2 before the filing deadline, but you can make the actual contribution to the plan up until your tax return is due. For all other business entity structures, all contributions must be made by the tax filing deadline plus six months if an extension is filed.
You can read more about the different retirement accounts and how they work in our article Understanding Your Retirement Plan Options as a Self-Employed Individual.
2. Make health savings account (HSA) contributions
If you had a high-deductible health plan in place for 2021, you are eligible to contribute to a health savings account (HSA) for the months you participated in the plan. HSA contributions are due by the April 18th, 2022 deadline, and the contribution limits are as follows:
- $3,600 for individuals
- $7,200 for families
- $1,000 catch-up contribution if you are over the age of 55
You can only make contributions for the months in which you were eligible. So, for example, if you switched to a high-deductible health plan halfway through the year, you would only be able to make six months-worth of contributions (e.g., for an individual it’d be $3,600/12 months = $300/month x 6 months = $1,800 maximum contribution).
One of the biggest benefits of HSAs is that they are the only triple tax-advantaged account out there. Contributions are made with pre-tax dollars so they reduce your taxable income in the year they are made. Funds can also be invested and can be withdrawn tax-free at any point to pay for qualified medical expenses. If you withdraw funds at any point that are not used for qualified medical expenses, you will be forced to pay ordinary income taxes on the distribution plus a 10% early withdrawal penalty. However, after age 65, there is no penalty assessed.
3. Dependent Care Costs
Depending on your income, the IRS allows you to deduct up to 50% of the expenses paid for the care of a qualifying individual to enable you (and your spouse, if filing a joint return) to work or actively look for work. For 2021, the total expenses that you may use to calculate the credit are capped at $8,000 for one qualifying individual, or $16,000 for two or more qualifying individuals. Expenses paid are eligible for the credit if the primary reason for paying the expense is to assure the qualifying individual’s well-being and protection.
A qualifying individual for the child and dependent care credit is:
- Your dependent qualifying child who was under age 13 when the care was provided,
- Your spouse what was physically or mentally incapable of self-care and lived with you for more than half of the year, or
- An individual who was physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (a) was your dependent; or (b) could have been your dependent except that he or she received gross income of $4,300 or more or filed a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer’s 2021 return.
The credit starts to phase out over $125,000 in adjusted gross income, so providing you make under the income limit, and you have qualifying expenses for a qualifying child, you could potentially get a maximum credit of $4,000 for one child and $8,000 for two or more. Additionally, the 2021 credit is refundable, which means that even if you have no tax liability, you can benefit from the credit in the form of a refund.
It’s also important to note, however, that if you have a dependent care flexible spending account (FSA), any qualifying expenses covered through that FSA cannot count towards the tax credit. The funds you put in an FSA are already pre-tax so you can’t “double-dip”, though, if your qualified expenses exceeded your FSA reimbursements for 2021, the difference could qualify for the credit providing they don’t exceed the $8,000 or $16,000 caps.
If you have dependents and potentially qualify for the credit, make sure you take some time before the tax filing deadline to review all the potential qualifying dependent care expenses you incurred in 2021 to maximize your deduction and potential refund.
4. Review your business expenses
If you were self-employed in 2021, you may have additional business expenses that you may have missed and can write off. Not all business owners are aware of what types of expenses qualify as business expenses and can therefore be deducted from self-employment income for the year. According to the IRS, the only requirement for an expense to be classified as a business expense is it must be “ordinary and necessary” to the operation of your business. Common business expenses may include:
- Business-related meals
- Business-related lodging and travel expenses
- Home office tax deduction (if you work from home)
- Cell phone and internet
- Software and other technology costs
- Equipment and materials
This is obviously not an exhaustive list of all the business expenses you might have, but it hopefully will get you thinking about any expenses you may have missed that you can deduct. In order to maximize your business deductions each year, we highly recommend maintaining clean books and records. You should have a good accounting tool in place, and a bookkeeper or CPA to help ensure you are keeping close track of all the expenses you incur and maximizing any other deductions you might qualify for.
5. File an extension if you need more time
If you run out of time to get everything done before the tax filing deadline, you can always file an extension, either electronically or by submitting Form 4868 to the IRS. An extension will give you an additional six months to file your return and take advantage of any of the tax tips we’ve covered above. The only caveat with filing an extension is that it does not give you more time to pay any potential tax payments due. In order to avoid any penalties, you must remit any tax due to the IRS when you file your extension. However, things like making an IRA contribution or adding up your dependent care costs can be done by the extension filing date.
With the tax return filing deadline fast approaching, now is the time to take advantage of any last minute moves to help mitigate any tax burden you might be facing for 2021. Depending on your current situation, there may be a number of different tax moves that you can take advantage of from making retirement account contributions to reviewing your business expenses for the year if you were self-employed. If you are not sure what makes sense for you and want help, schedule a free tax consultation with our experienced in-house tax team to see how we can help you maximize your tax deductions for the year.
Securities and investment advisory services offered through Calton & Associates, Inc. member FINRA and SIPC, a Registered Investment Adviser. Forefront Wealth Partners is not owned or controlled by Calton & Associates, Inc.