It is all but certain at this point that new tax laws will be passed through the Build Back Better plan. I’ve written about the changes likely to occur here. But, if you are among those households whose tax situation is about to dramatically increase, there are some strategies you can implement now to help reduce your future tax burden!
The tax increases are mostly going to affect those Single tax filers with over $400,000 in modified adjusted gross income (MAGI) and Married Filing Jointly tax filers with MAGI over $450,000. So, if you are one of these households, then you want to take action before the 2021 tax season ends.
Although it may seem counterintuitive, some of the best strategies to reduce future taxes, is to not take some of those tax deductions for 2021. That doesn’t necessarily mean that you don’t implement ANY tax strategies, it just means that you look for ways to delay income or delay deductions for larger ones in the early 2022 tax season.
To offer up some suggestions, rather than thoroughly confuse you, I’m going to give you 5 strategies to help you save money and potentially keep you out of those higher tax brackets imminent in the proposed Build Back Better plan.
1. DONOR ADVISED FUNDS (DAFS)
A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual. You will want to get the fund set up in 2021, so that you can make your contribution in 2022.
These are really powerful because you get an immediate deduction upon the contribution, however, you don’t have to distribute the money to the charity immediately. You can invest these funds and receive tax deferred growth on that money. And, you get to choose which charities who receive the money and when!
You can also contribute highly appreciated stocks or assets that would otherwise be subject to the higher 2022 capital gains taxes and remove it from taxation altogether.
2. ACCELERATE INCENTIVE PAY
If you or your spouse are expecting to receive bonus money or monetary incentives sometime in the next year, ask your employer if those funds can be paid before the end of 2021. It could be advantageous to both the employer and your family! Of course, this is if the extra income does not push you into a higher tax bracket than you will be responsible for in 2022.
Similarly, for real estate agents, if you have a couple of escrows closing before the end of the year, see if your broker can get those checks paid out and deposited into your account before December 31st to qualify as income for the 2021 tax season.
3. REAL ESTATE INVESTMENT EXPENSES
Most of my audience are real estate professionals and almost all of my real estate agent clients own rental real estate- whether those are short-term rentals or long-term rentals.
For those that own real estate, you already know that improvements or expenses can, and always will, need to be made. Everything from needing a new air conditioner, water heater, or simply to upgrade to a more modern look are needed regularly.
So, if you had planned to replace or upgrade anything on your properties, 2022 may be the year to do it. By waiting to pay for those items into the next tax year, those expenses can go to offset your Schedule E real estate income. Or, if you are a real estate professional, it reduces down your overall household income. This, in turn, reduces down your tax liability.
4. BONUS DEPRECIATION
This relates to the last point about real estate investment expenses. However, this has to do with those big ticket items. Let’s say you wanted to upgrade the house to have a HVAC system, or put on a new roof to several of your properties, or maybe replace a septic system.
Bonus depreciation allows you to accelerate the depreciation of those items, that were previously depreciated over 5 or 7 years, into a single tax year. Meaning, the entire expense can be depreciated in 2022, helping you to dramatically reduce your taxes in a higher income year.
5. RETIREMENT PLANS
For those that are self-employed, contributing to retirement plans can reduce your taxable income in a HUGE way! You may already be contributing the maximum to your IRA, SEP IRA or another type of retirement plan.
But, the right combination of retirement plans can allow you to supersize your contributions!
I’ve discussed the difference between the SEP IRA and the Solo 401(k), and by implementing the Solo 401(k), you can make sure that every year’s contributions are maximized. And, by adding a Defined Benefit Plan to the mix, you could potentially be savings $100,000 + from income taxes each year!
To help reduce your future tax bill, think about finding the right combination of retirement plans that will help you keep out of the proposed higher tax brackets in 2022.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.