Didn’t we just file taxes? With the drawn-out deadlines and extensions this past year, it really feels like we could use another several months to get our finances in order for 2021. However, the hard truth is that the next tax season is around the corner and it’s time, yet again, to get organized.
COVID-19 continues to have a significant impact on our finances. The Paycheck Protection Program, the Employee Retention Credit, and the Advanced Child Tax Credits are all products of the pandemic that will have implications for the 2021 tax season.
And with a presidential change in office, we’ll be seeing some tax increases, especially if the Build Back Better bill is passed by the Senate. This isn’t necessarily a bad thing, but it’s best to be prepared and to know what could help you get your ducks in a row, and maybe even save some time and money.
Here are five things to consider as you prepare your taxes for 2021.
Deferring income: Typically, we suggest that businesses follow appropriate guidelines to defer income into the next tax year to reduce their tax implications, but in this case, it may be wise to move income into 2021, if you can.
IRA conversions: If you’ve been debating whether to convert a traditional IRA to a Roth IRA, this is the year to do it. Historically low tax rates make 2021 a great year to convert your traditional IRA to a Roth. In a few years, tax rates will rise and you want to lock in a lower rate now so you pay less in retirement.
Backdoor Roth: If you are hoping to put money away at the end of the year and you are ineligible for traditional IRAs because of your income level, look into a Backdoor Roth. This is not an official type of individual retirement account, instead, an informal name for a complicated IRS-sanctioned method for high-income taxpayers to fund a Roth. Important to note, this option will be eliminated within Biden’s tax plan if it passes as is, so now is the time to act.
Estate and gift: Revisit your estate and gift tax plans with possible reductions in the exclusions as part of the Build Back Better plan.
Ask for forgiveness now on your Paycheck Protection Program business loans: The sooner you apply, the sooner this will be behind you, so our advice for all who’ve received a loan and have completed the payments in the allocated time frame, seek forgiveness now. You will want to make sure you apply early enough that you receive forgiveness in 2021 in order to take the forgiven loan amount into your basis. In some situations, this could mean the difference between paying tax on distributions and not paying tax on them. Borrowers can apply for forgiveness any time up to the maturity date of the loan, but if you do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred. A tip: make sure not to double dip between ERC and PPP2 usage of expenses.
It’s been a long couple of years for everyone and the last thing we all need is to pay more money than we can afford, or even spend more time on taxes than we have (and no one has time). Getting organized early on benefits the taxpayer and usually results in significant savings in the end. Rip the band aid off now and you’ll be in great shape.
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