2021 Year-End Tax Planning

While 2021 was a new year, many were and still are feeling the ramifications of 2020. We would like to share tax saving opportunities and tax-related issues that should be top-of-mind as we prepare to close out the year. Please contact us if you would like to discuss any of this information and application to your tax situation. Note that at this time the Build Back Better Act (BBBA) seems unlikely to pass.  Consequently the proposal items are excluded from this information.

Key Adjusted Numbers

Individual Considerations

  • Unemployment compensation received in 2021 is taxable income; the $10,200 exclusion utilized in 2020 does not apply.
  • If the individual has an AGI under certain thresholds, they are eligible for a recovery rebate credit of up to $1,400 plus an additional $1,400 for each dependent for 2021.

Purchase solar electric property as this purchase will generate federal tax credits calculates as a percentage of the cost of the property. However, the tax credits received will be reduced over the next few years. The applicable percentage to calculate the tax credit are as follows:

A cash-basis taxpayer can accelerate income by sending invoices and collecting payment before December 31, 2021.  Also, a cash-basis taxpayer can defer the expense until 2022 to defer deductions.

However, it may be more beneficial to defer income to 2022 and accelerate deductions to 2021 if it will enable the taxpayer to claim larger deductions, credits, and other tax breaks for 2021 that are phased out over varying levels of AGI.  These include deductible IRA contributions, child tax credits, higher education tax credits, deductions for student loan interest, and the recovery rebate credit.  Postponing income is also beneficial for taxpayers that anticipate being in a lower tax bracket next year.

Individual Deductions

Many taxpayers won’t be able to itemize deductions due to the high standard deduction for 2021 and because many itemized deductions have been reduced or abolished. Some taxpayers may be able to work around these deduction restrictions by utilizing a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will have the most impact on their tax returns.

For example, if a taxpayer knows they will be able to itemize deductions in 2021 but not in 2022, the taxpayer would benefit from making two years’ worth of charitable contributions in the current year instead of spreading it out over 2021 and 2022.

Business Considerations

Note: additional requirements may need to be met to take the deduction.

For 2021, under Section 179, a business may expense up to $1,050,000 with an investment ceiling limit of $2,620,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. These amounts increase in 2022 to $1,080,000 for expensing with an investment ceiling limit of $2,700,000.

Bonus Depreciation

Businesses are able to claim a 100% bonus first-year depreciation deduction for capitalized assets bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is allowed without any proration based on the length of time that the asset is in service during the tax year. This means that 100% of the cost of the asset is deductible even if the qualifying asset was only in service for a few days in 2021.

High bonus depreciation is in effect through 2026

Impact of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2021le

Qualified improvement property (QIP) was assigned a 15-year recovery period; prior to the CARES Act, QIP had a 39-year life. With the 15-year life, QIP is eligible for bonus depreciation.

  • QIP is any improvement to an interior portion of a building that is nonresidential real property if such improvement is placed in service after the date the building was first placed into service. The improvement must be made by the taxpayer.
  • QIP does not include expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

Paycheck Protection Program (PPP) Loans

Throughout 2021, many businesses received forgiveness of their PPP loans. Generally, forgiveness of debt is taxable income, but, for federal tax purposes, the income from the forgiveness of the PPP loans are tax-exempt and the expenses paid with the proceeds from the forgiven PPP loans are also deductible. However, for state income tax purposes, the treatment of the PPP loans will vary depending on each state. A summary of each state’s treatment of the forgiven PPP loans can be found here: https://taxfoundation.org/state-tax-forgiven-ppp-loans/.

Net operating losses (NOL)

NOLs generated in tax years beginning after December 31, 2020 are not eligible to be carried back, but can be carried forward indefinitely.

Non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special 20% deduction. Eligible businesses should review opportunities to maximize the QBI deduction. The QBI deduction will be limited based on filing status:

o Married filing joint = $500,000
o Single or head of household = $400,000
o Married filing separate = $250,000

Beginning on January 1, 2021, the NOL deduction is limited to 80% of taxable income (not including the NOL deduction and QBI deduction). A summary of each state’s treatment of NOL can be found here: https://taxfoundation.org/state-conformity-cares-act-unemployment/#NOL

Considerations for Retirement Accounts

If an individual has funds to pay the tax, consider a Roth conversion in 2021 for the following benefits:

o Gain recognition, preferably in lower tax brackets.

o No income recognized in future years

o Tax-free growth until distribution

o No regular RMDs are enforced on Roth IRAs during the owner’s life

Considerations for the Estate and Gift Taxes

Request your CPA to review your estate documents to find out the impact of new tax laws and changes to your estate.

Considerations for the Hawaii Taxes

Details and timing of paycheck protection program loan forgiveness (PPP)

Hawaii Department of Taxation released Tax Information Release (TIR No. 2021-05) to provide further guidance related claiming of deduction for expenses paid with PPP funds. PPP loan forgiveness amounts are excluded from gross income for federal and Hawaii tax purposes. However if the expenses paid by the taxpayer entitle it to the PPP loan forgiveness, and the taxpayer has a reasonable expectation of forgiveness, the deductions are not allowed on the Hawaii return https://files.hawaii.gov/tax/legal/tir/tir21-05.pdf

Exemption from Taxes in a Foreign Trade Zone (TIR No. 2021-07)

Responding to a request for clarification as to whether the Foreign-Trade Zones Act of 1934, codified as amended at 19 USC. § 81a-81u (2016) (FTZ Act), preempts Hawaii from imposing general excise and use tax on activity conducted within a foreign-trade zone, a Hawaii Attorney General opinion concludes that Hawaii’s general excise tax and use tax are not expressly preempted by the FTZ Act. In doing so, the opinion explains that in 1984, Congress amended the FTZ Act to specify that only state and local ad valorem taxes on imported and domestic goods held for export are preempted. Under this reasoning, the opinion explains that Hawaii’s general excise tax is not an ad valorem tax, as it is imposed once on a transaction and is measured “by the income realized by the particular activity engaged in by the taxpayer within the state.” Similarly, Hawaii’s use tax, which is complementary to the general excise tax, “is not an ad valorem tax, as it is imposed once upon the import of the tangible personal property” into Hawaii. https://files.hawaii.gov/tax/legal/tir/tir21-07.pdf

Making Tax Season Easier