Year-End Tax Strategies
By Peter T. Waldron
Managing Partner of Waldron Partners
"Dear IRS, I am writing to you to cancel my subscription. Please remove my name from your mailing list." — Snoopy
The end of the year always has a way of creeping up on me. Suddenly, I turn around, and there are boxes of fall decorations piled in the garage ready for a literal explosion of colors throughout my house (my wife loves autumn). Fall is also a great time to start thinking about taxes – more specifically, how to mitigate them. Every year we contemplate various ways to potentially reduce our tax bill, and every year the rules change ever so slightly. If you are interested in some ideas about how you can lower your taxes, read on, as this article will articulate some of those strategies.
When it comes to year-end tax reduction strategies, here are the top 12 items that individuals and business owners should focus on:
Employee 401(k) Contributions: $19,500 (50 and older: $26,000) – Make sure that you will maximize your retirement contribution. Every dollar that you put into your 401(k) is a dollar that reduces your taxable income. Your employer’s contributions are above and beyond these limits, so be sure your dollars are maxed out. Roth 401(k)s are a good idea for lower income earners and sometimes as you approach retirement.
Charitable Donations: 100% of adjusted gross income (AGI) for cash donations / 30% of AGI for stock donations – If you don’t itemize your deductions (and instead use the standard deduction), your taxes will not be reduced by donations. However, if you itemize, you can take advantage of charitable deductions. Remember: the goal of donating is to help society in addition to reducing your tax bill, but you must give up something. If you don’t know what cause to support, you can use a donor-advised fund to begin funding future giving today.
Health Savings Accounts (HSAs): $3,650 for individual / $7,300 for family – HSAs eliminate taxes on expenses like doctor office visits, prescriptions, and physical therapy, among other items. This type of account also allows you to accumulate and spend your money out of a pre-tax account.
Dependent Care Flexible Spending Accounts (FSAs): $5,250 for individual / $10,500 for family – Similar to an HSA, an FSA allows you to save on a pre-tax basis and then spend those dollars on eligible dependent care expenses, such as preschool/nursery school, summer day camp, and adult day care.
Tax Loss Harvesting: $3,000 to unlimited – While this seems straightforward, many people miss the opportunity to save tax dollars because they are not mindful of their taxable investment accounts. At the bottom of the market in March of this year, you could have booked losses while remaining invested for the recovery. These realized losses are matched against unlimited gains and can be carried forward until they are exhausted. If you don’t have gains, you can use them to offset $3,000 of normal income.
Starting a Business: Starting a small business provides many benefits, including the ability to write 0ff expenses like phones, cars, a home office space, computers, travel, and much more. It is important to note that the IRS does not consider a hobby to be a business; you will need to earn an income. Remember: any income earned is taxable unless there are expenses to offset.
California Assembly Bill (AB) 150 - In essence, this allows a K-1 recipient to reduce adjusted gross income (AGI) rather than having a state tax deduction on Schedule A, which would be subject to the $10,000 SALT deduction limit. The owner reports the net income to California (which doesn’t include the tax payment) and receives a California tax credit equal to the state tax paid by the passthrough entity on behalf of the owner.
Depreciation – If you purchased assets this year, make sure to depreciate them on your tax return. This includes office furniture, equipment, computers, appliances, and automobiles. Review whether Section 179 and bonus depreciation apply to your purchase(s).
Cost Segregation – For investors in commercial and multi-unit properties, you can complete a cost segregation analysis to reestablish more favorable depreciation schedules for parts of your property. For example, some of your property’s elements (AC, flooring, etc.) have a depreciation schedule that is shorter (seven years) than the typical 27.5 or 39 years. You can move that tax benefit forward and potentially put cash back in your hands versus stretching the benefit over the next 39 years.
Amortization – The idea of buying someone else’s business might seem daunting; however, the government will give you a tax benefit of which most people are not aware: amortization. If you purchase another business you can amortize the cost of the purchase over 15 years, which means that every year part of the purchase price is deducted from your tax bill.
Employee Benefits – You can choose to provide your employees with different benefits, including retirement and insurance such as health, disability, life, and long-term care. These benefits have various levels of deductibility. Additionally, as an owner of the company, you can also participate with certain limitations and advantages. Note that with the passing of the CalSavers law, retirement plans may be mandatory depending on the size of your company.
General Deductions – While it is important to run a cash flow positive business, don’t forget the old adage: “In order to make money, you must spend money.” The MBA in me would pose a few questions: What is the cost of the capital? What will the return be on the spend? What is the breakeven analysis? In all seriousness, bringing on a new employee can boost productivity, spending money on marketing this year might lead to growth in the future, and developing your people (which costs money) could enhance your competitive position.
Taxes are an inevitability, but you as a citizen deserve to take advantage of the code provided. It isn’t about cheating the system, but rather exercising your rights. While life gives us two guarantees – death and taxes – hopefully this article provides some insight into how you can limit the impact of one of them. I wish you and your family a wonderful start to your fall season.
“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey
PLEASE CONTACT PETER WALDRON TO SCHEDULE A COMPLIMENTARY REVIEW OF YOUR FINANCIAL SITUATION: 925-786-7686 or email@example.com
Peter T. Waldron, California Insurance License #0E47827, is a registered representative of Lincoln Financial Advisors, a broker/dealer, member SIPC, and offers investment advisory services through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, Waldron Partners, 3201 Danville Blvd., Suite 190 PO Box 528, Alamo, CA 94507. Waldron Partners is not an affiliate of Lincoln Financial Advisors. Insurance is offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. This material is for use with the general public and is designed for informational or educational purposes only. It is not intended as legal, tax, or direct investment advice. Lincoln Financial Advisors does not offer legal or tax advice. CRN-3782728-092221