- If 2021 was good for business, there are ways to cut back on your tax bill while also planning for your future.
Ending the year with cash in the bank can be a great feeling for any entrepreneur. But finding out a good year in a business can mean forking over more in taxes can quickly dampen that mood.
“Any money you don’t pay in taxes is money you have left to invest,” says Holly Mayer, First Vice President of Wealth Management, Financial Advisor at Mayer Wealth Advisory of Janney Montgomery Scott LLC. “A lot of times, entrepreneurs are investing in their business, and they forget to invest in themselves. You can do both.”
For entrepreneurs and businesses that find themselves with extra cash at the end of the year, there are several things to consider to help plan for the future while snagging some extra tax deductions.
Here are six financial considerations before year end:
1. Explore Roth conversions
2021 might be the year to convert your Traditional IRA or 401(k) funds to a Roth IRA. Although this conversion can result in immediate taxation, federal tax rates are historically low — and might not stay that way for long.
There’s also the option to do smaller, partial conversions to use lower tax brackets. All conversions must be completed by Dec. 31, 2021, in order to qualify for this tax year.
2. Look into IRA options
For entrepreneurs, a Simplified Employee Pension (SEP) IRA can be a great addition to year-end tax planning ideas. Individuals can put up to 25% or a max of $57,000 to an account. This is usually a good option if you have fewer than 100 employees as you can adjust contributions based on cash flow. Plans must be established by Dec. 31, 2021, to be considered part of the 2021 tax deduction.
A Simple IRA is also a good consideration for future years, as it must be established by Oct. 31 of the same tax year to reap the tax benefits. The Simple IRA allows both the employer (a small business or sole proprietor) and the employee to make a contribution. The contribution limit is $13,500 for 2021, although those older than 50 can contribute up to $16,500.
3. Consider the tax deferral opportunities of net unrealized appreciation
For those with highly appreciated company stock in a company plan, Net Unrealized Appreciation (NUA) can allow significant tax savings by using long-term capital gains rates, rather than ordinary income tax rates on those shares. If someone took distribution of company stock from their company plan in 2021, they must follow proper steps by year end, making sure distribution is completed in one tax year. Funds should be transferred to a taxable (non-IRA) account.
4. Consider charitable giving
Normally, itemized deductions for charitable contributions can’t exceed 60% of adjusted gross income in a single tax year. But Congress suspended the 60% limit for 2020 cash donations and extended that into 2021. This means you can withdrawal from an IRA or company plan for any amount in 2021 and donate that same amount to a charity.
You must itemize to take advantage of this strategy.
5. Maximize retirement and health savings accounts
IRA and Roth IRA contributions have an April 15 deadline, but employer-sponsored retirement plans need to receive contributions by Dec. 31, 2021. Your contribution to an HSA also needs to be received by Dec. 31, 2021.
6. Spend down your flexible spending accounts
Flexible Spending Accounts (FSA) follow a “use it or lose it” rule. If you took the time to fund it with pre-tax dollars, don’t forget that it needs to be spent down by the end of the year.
Get the right advice
While a lot of entrepreneurs have the do-it-yourself mentality, speaking with a financial advisor can ensure you get the most out of your year-end tax plans. For Holly, just about anyone can buy an investment, but they need guidance of finding the right investment that aligns with their goals.
“The landscape of how and what to invest in is always changing,” she says. “I enjoy giving that valuable advice because I have seen how it impacts someone’s life and helps them reach their goals. They don’t have to do it alone.”
The concepts illustrated here have legal, accounting and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your particular circumstances. Past performance is not an indication of future results.