As this year draws to an end, it’s time to think about your income taxes due on April 15. Impacts of the lingering coronavirus pandemic afforded many Americans temporary financial relief in some areas. But these emergency provisions may impact your final tax liability. There are additional changes for this year you must understand, as well. This article covers a few 2021 tax planning tips for individuals to help you organize the information you need to prepare your taxes.
Required Minimum Distributions
Required minimum distributions (RMDs) from retirement plans were waived in 2020 due to the pandemic. But you are required to take a distribution for 2021. RMDs are calculated based on the balance of your account on the last day of the previous year—so this year’s distribution may be a bit higher than you expected if you opted out of taking one in 2020.
Child Tax Credits
If you are eligible for a child tax credit and received an advanced tax child credit from the IRS in 2021, this impacts your income tax return. The amount you received from the IRS as an advanced child tax credit determines the amount of the credit you can claim on your return. If the amount of your advanced credit was less than the credit you qualify for, you can deduct the balance owed to you on your income tax return. However, if your advanced credit was more than you’re allowed to claim on your return, you’ll probably have to pay some, if not all, of that excess credit back.
Net Operating Loss
Net operating loss (NOL) sounds like a business provision (and it is), but individuals can also incur net operating losses when your deductions exceed your income for the year. But, starting in 2021, you’re no longer allowed to carry back your NOL to a previous year—it must be carried forward for a time frame that the IRS deems as “indefinitely.” Consult with your tax advisor to ensure you comply as this is limited to 80 percent of your taxable income.
There is good news in this category. Thanks to the CARES Act, itemizers and non-itemizers were given a bit of flexibility regarding charitable donation deductions in 2020 that also apply to 2021.
Non-itemizers: can claim up to $300 (or up to $600 if you’re married filing jointly) of a cash donation made to a qualified organization.
Itemizers: can apply up to 100 percent of your 2021 AGI for cash contributions to qualified organizations.
Final Thoughts on 2021 Income Tax Planning
This is not an all-inclusive list of updates and changes that effect your income tax liability. Tax laws often change year-to-year for individuals. It’s important to educate yourself to a degree to understand how any changes impact your personal and business taxes. It’s equally important to work with qualified professionals who can help you navigate the intricacies so you don’t get yourself in a mess with the IRS.
Pantheon Wealth Planning and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.