Year-end best practices for business
Whew! The last two years have been a whirlwind with the virus, politics, and volatile markets. Tax laws may see some changes but as of now, we remain unsure of any specifics. History tells us that anything passed late in the year will have only a few provisions that require immediate attention, and we can do more comprehensive strategies later once we know what the new law contains.
It’s a best practice to have some idea of how your year will end profit-wise. The type of entity that generates your income is key. For example, you may operate your business in several entities, and one may be a Subchapter S-Corporation (S-Corp) and another that is a limited liability company (LLC). Income from either entity type is taxed at ordinary tax rates, but there are other taxes like employment tax on the LLC that is triggered, and that adds to your tax bill. If you are new to the effects that your profits and losses will have, then you will need to consult your tax advisor for clarity.
If you are a participant in a retirement plan (401k, 403b, 457, IRA, Roth IRA, IRA/SEP, SIMPLE IRA, etc.) and you had earned income during the year, it’s advisable to take steps to maximize those contributions for the year. Each type of account has a maximum amount that can be contributed by the worker for IRAs that are certain modified adjusted gross income thresholds.
Health plan enrollment
Many company health plans renew at calendar year-end. Employers may provide generous options to participants, and the only time to make those elections are during the company plan’s open enrollment period. Additional disability and life insurance can be a great resource for your family should an accident or health situation arise.
Use flexible spending dollars
If you contributed to a flexible spending account (FSA) in 2020, the IRS relaxed certain use-or-lose restrictions that are in effect this year. Normally, employees were required to spend their tax-free contributions in the calendar year. For 2020, employers have the option of allowing participants to extend the grace period for up to 12 months in 2021.
Make health savings account (HSA) contributions
If you participate in a high deductible health plan (HDHP), you may want to consider increasing your HSA contributions to maximize your contributions. This type of benefit allows you some tax-deferred growth as well as a great way to fund health costs in your retirement years.
Child tax credit
You will want to analyze the effect of the Child Tax Credit that was changed in 2021. In July of 2021, the IRS began issuing 50 percent of this credit in six monthly advanced payments. The payments are based on your 2020 income. If your income or child situation changed in 2021, you will need to be ready to reconcile and either payback or claim the difference on your 2021 tax return.
As for the Child and Dependent Care Credit, for 2021, the credit is a refundable credit, which means you can claim it and receive money from the government even if you had no tax liability. If you make less than $125,000 in 2021, you can claim one-half of expenses of up to $8,000 for one child and up to $16,000 for two or more eligible dependents.
Withholding and estimated taxes
It is sound advice to project your withholding and estimated tax payments through year-end to assure that you are not in a penalty situation in the current year. If you find yourself with not enough paid in to cover the prior year’s tax, and if your tax liability is more in the current year, you may owe penalties on your 2021 tax return. It’s usually beneficial to check in with your tax professional at year-end to calculate a tax projection.
Year-end is a great time to review your estate plan to assure that it is in alignment with any changes in your personal situation. You may want to update any beneficiary designations, trustee appointments, powers of attorney, and health care directives.
Before year-end is a great time to prepare a schedule of this year’s charitable contributions. One reason is to assure that if you give to numerous organizations or significant amounts to several, those gifts are appropriately timed, and the IRS’s standard deduction is considered in your tax planning. Some taxpayers find it beneficial to bunch multiple charitable donations into one year and utilize the standard deduction in a year where there were no reportable charitable contributions. The other reason is to verify that you have documentation for all your required receipts for the donations you’ve made this year in case you are audited by the IRS in the future.
Tax loss harvesting
If you have experienced some realized capital gains during the year, it is usually a solid practice to review your portfolio and offset those capital gains with realized capital losses that may exist in your investment portfolio. Such a practice is known as tax-loss harvesting. Be aware that such losses are subject to the wash-sale rules, which do not allow losses where investors repurchase those positions within 30 days of the original sale. Also, the maximum allowable net capital loss deduction on an individual return is $3,000 but you can carry over any excess to future years.
Most people are not that concerned with their credit score until they need to borrow money. Then, it becomes primary. The Consumer Financial Protection Bureau recommends checking your credit regularly to identify any errors. There have been numerous data breaches in the last few years that have involved millions of Americans. It is important to fix such errors as soon as they are found.
Digitizing your accounts
One big lesson from the pandemic was that we all needed to improve our use of technology. Some clients were ready and had their financial house in order. Others were not ready. It’s advisable to make a goal of having your entire financial life organized and completely digitized in starting in 2022. This can be done with some intention. When it’s done, it’s liberating!
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About Jim Denton
Jim Denton, CPA/PFS, CGMA is Partner Emeritus of Arledge & Associates, PC where he is responsible for providing leadership to the firm’s Wealth Management firm, Summit Capital Advisors, LLC. Mr. Denton empowers his clients, so they may live their best life. He may be reached by email at email@example.com.
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