Tax returns are due in just a few weeks. Most individual tax filers without an extension have a due date of Apr. 18, while business taxes were due Mar. 15. At Sun Valley Financial, we work with most of our clients to keep them on track and implement tax-saving strategies throughout the year. For those individuals and families looking to take advantage of last-minute savings, here are some tips:
- File your taxes on time
This might be an obvious one, but we have seen individuals not mail in their tax returns, forget to transmit returns to the IRS and state, or forget to file for an extension if they need more time. According to the IRS, the penalty for failure to file is 5% of unpaid taxes each month the return is late, not to exceed 25% of the unpaid tax. In our home state of Arizona, the late payment penalty could be .05% of the tax due per month. Even with an extension, individuals must meet their tax obligations in a timely manner
- Double check tax credit opportunities and deductions
According to TurboTax there are more than 45 million tax payers with itemized deductions on their 1040s, claiming a whopping $1.2 trillion in tax deductions. For some Americans, there are many potential tax deductions and tax credits available. Some of the most easily overlooked items are:
- Charitable gifts/contributions – Did you drop something off at your local thrift store? Did you donate to your favorite charity or have an automatic charitable contribution your employer matched through payroll? Make sure you add up those donations and submit them with your tax returns. Driving for charity also allows you a tax deduction of 14 cents per mile, plus parking and tolls paid.
- State sales tax – While not applicable in Arizona because we pay state income tax, some itemizers might be able to get a tax deduction on state sales tax.
- Jury duty pay – If your employer compensated you in full but requested you pay them your court-paid jury duty pay, you are eligible to take a deduction by reporting the amounts surrendered to your employer.
- Rebate recovery credit – If you were eligible to receive part or all of the third stimulus payment and did not receive it, you can recover it by claiming this credit.
- Refinancing points – For those who have purchased homes, you are able to deduct any points you paid to get a lower rate. Points purchased via a refinance are usually deductible over the life of that new loan.
- American opportunity credit – A credit that applies to the first four years of college, this allows individuals to take the credit based on the first $2,000 in qualified college expenses and 25% on the next $2,000 in expenses. These credits are phased out at $80,000 in income for individual filers and $160,000 for married couples
- IRA deductions
Individuals looking to make last-minute contributions to a Roth or traditional IRA can do so up to their tax filing date. You may also backdate contributions to last year if you did not max out your contributions based on age. The limit for Roth and traditional IRA contributions is $6,000 plus $1,000 for individuals over the age of 50, subject to income limitations
- Health savings accounts (HSA)
Health savings accounts are a fantastic tool to supplement most retirement plans. The first requirement is to participate in a high-deductible health insurance plan. Individuals can then contribute up to $3,600 in 2021 and $7,200 plus $1,000 for individuals over the age of 55. Additionally, if you contribute to an HSA through work and have not hit your limit, you may be able to write a check to your HSA for the difference between your contributions and your limit and take an additional deduction on that amount.
- Spend down your flexible spending account
Flexible spending accounts, not to be confused with health spending accounts, or HSAs, are a type of benefit that allows employees to allocate dollars for qualified medical expenses and qualified dependent care. These dollars are exempt from income and Social Security taxes. The “use it or lose it” component of these accounts generates between $400 million and $500 million in forfeited benefits per year, according to FSA Store. Some employers were allowing their employees to spend down the money until Mar. 15. Additionally, the Consolidated Appropriations Act of 2020 allows employers to extend FSA grace periods by up to 12 months for plans ending that ended in 2020 and 2021.
What about the small business owners, those who work for themselves and individuals with 1099 income?
We have some tips for you, too! Whether you run a small business full time or have a side job to generate extra income, make sure you take advantage of some of these tips.
- Retirement account contributions
Self-employed individuals or small business owners have more flexibility when it comes to retirement accounts. As an employer, you can still make contributions to profit-sharing plans, SEP, SIMPLE IRA plans and money-purchase plans. As an employee, you can make contributions to traditional and Roth IRAs. All of these contributions can be made for 2021 up until your tax due date and can offset some of the tax liability
- Health savings accounts
Those who don’t have an employer-sponsored HSA can set one up through various HSA banks and self-fund contributions, subject to IRS limits and guidelines.
- Interest paid on credit cards and loans
Economic injury disaster loans, credit cards, lines of credits and most interest generated by loans in the name of the business may be deductible.
- Business meals
For the years 2021 and 2022, business meals are 100% deductible, up from the standard 50% rate.
- The Coronavirus Aid, Relief and Economic Security Act with the Families First Coronavirus Response Act
The CARES Act and the FFCRA provide some relief to those who are self-employed, freelancers and independent contractors to help cover the cost of taking time off of work due to the spread of the COVID-19 virus. There are three requirements that must be met, and the credit can be worth up to $511 per day for up to 10 days
As always, we recommend consulting with your tax professional. If you have any questions specific to your needs, please reach out. Sun Valley Financial is here to help.