There’s only a month to go before the calendar turns over to 2022 (with tax season just ahead). Here are some important financial and tax planning considerations for business owners, highly compensated employees, and high-net-worth (HNW) individuals to review and decide upon before the end of the calendar year.
Income deferral or acceleration in the current year
- Congress is considering raising the highest tax rate to 39.6% (currently 37%). By accelerating income into the current year and thereby maximizing the tax bracket they’re in, HNW individuals could save several points on their taxes in the future, if this change happens.
- Consider utilizing the full tax bracket you are in and avoid jumping into the next highest tax bracket (for example, taxpayers in the 24% bracket could jump up to 32%.)
- If you don’t know if you will be in a higher tax bracket next year, consider how much income to take now based on your current rate; this applies to retirees as well, regarding retirement plan distribution amounts.
- A high-income surcharge is included in the House version of the Build Back Better bill. It would impose a surcharge on taxpayers whose adjusted gross income (AGI) exceeds $10 million (a 5% surcharge on the amount above $10M) plus another 3% on AGI that exceeds $25 million.
- SALT update: Presently the Build Back Better Act includes a provision to increase SALT (state and local tax) deductions, which had been lowered to a maximum of $10,000 in the 2017 tax reform bill. This rollback, if passed by the Senate, could increase the SALT deduction to upwards of $80,000 for taxpayers earning less than $400,000 in joint income.
- Use your business credit card to prepay certain business expenses now and get a current year deduction, even if the charges are billed and paid in January.
- Consider purchasing business equipment before year end and get a full write-off for the purchase up to $1,050,000 as a Section 179 deduction. Note that the equipment purchased must be placed in service prior to the end of the year.
- Review your expenses to make sure you are taking full advantage of allowed business deductions, such as 100% deductions for business meals in 2021 and 2022 (entertainment is still not deductible).
State tax implications
If you are now doing business in states in which you hadn’t done so before, you might have to register in that state and your company may be subject to other state taxes. Remote worker alert: If you reside in one state but earn money in another, you will be taxed at the rate of the state in which the money is earned. This also applies if you are working from home in one state at the convenience of your out-of-state employer.
Investments and retirement accounts.
- Retirement plans: The Secure Act extended the deadline for employers to adopt a new traditional 401(k) plan from the last day of the tax year until the due date of that year’s tax return (including extensions). That means the deadline for employers to adopt the new calendar-based plan will depend on their tax status:
|Tax Status||Filing Deadline||Extended Deadline|
|S-Corporation||March 15||September 15|
|Partnership / LLC||March 15||September 15|
|C-Corporation||April 15||October 15|
|Sole Proprietorship or Single Member LLC||April 15||October 15|
- Wash sale rules: If you sell a stock at a loss, do not buy it back before 30 days or you cannot realize the loss on your tax return. You can only realize the loss starting on Day 31. Note that this rule currently does not apply to cryptocurrency investments, but may apply in the future.
Prevent tax penalties
Pay your quarterly estimated taxes timely AND be sure to cover your safe harbor tax liability by paying 110% of last year’s federal and state tax bill (even if you don’t yet know your full 2021 income). That way, even if your 2021 income was higher than 2020, you will be able to pay your tax balance in April without any late penalties or interest. If you are short on those estimated payments, you could incur penalties and interest at tax filing time
Finalize budgets and projections
This includes evaluating your business to determine if you’ll be upsizing or downsizing location or workforce, capital improvements, and improving employee benefits.