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Kimberly Key, a professor at Auburn University, provides advice on year-end financial and tax planning. She is a PWC Professor of Accounting at Harbert College of Business at Auburn University.
What do you recommend for year-end financial and tax planning?
We should all periodically review our finances, which in December will naturally bring tax matters to the fore. Conversations with family members and financial and tax advisors are empowering because people can feel in control of their current and future finances. General questions include: How will this year and next year be or could be different? Are life changes on the horizon (like retirement, getting married or having a baby)? Are one-time financial gains or costs expected? These life changes can have significant financial and tax ramifications.
Small changes are always possible. For example, it might be possible to increase a monthly investment in a work-related or individual retirement account or an education savings account, which have tax advantages. Although not directly related to taxes, someone with credit card or other debt should consider increasing monthly payments. Tracking ideas is key.
What do you recommend regarding specific year-end tax deductions?
2021 is a good year to donate to a favorite charity. Congress made a temporary change to the tax law to allow a deduction of $300 (unmarried filers) or $600 (married joint filers) for taxpayers who take the standard deduction. The IRS estimates that 90% of taxpayers use the standard deduction, so this rule affects a significant number of people.
Traditional Individual Retirement Accounts (IRAs) are good for saving and can offer common tax benefits. (A Roth IRA is also good for savings, but the tax advantages are upon withdrawal.) Contributions for 2021 can be made until April 15, 2022, giving taxpayers the opportunity to review their tax situation and then decide if they want to make and designate contributions as of 2021. Depending on the taxpayers income, contributions to the IRA could be deductible.
Are there any new deductions or developments that would affect year-end tax planning or spending in general?
Congress increased the child tax credit for 2021. Many taxpayers are aware of this change because the law also required the IRS to make advance payments of half the credit. These six months of payments – from July 2020 to December 2020 – were made to people who appear to be eligible for the credit based on past tax filing data. There will be a calculation when tax returns are completed, as 2021 income affects eligibility and the amount of the credit. Many will receive the rest of the credit when they file 2021 tax returns, but others may find they don’t actually qualify for some or all of the credit. In this case, taxpayers could end up with an amount owed to the IRS or a smaller refund.
The end result of the Build Back Better legislation that passed the House but not the Senate is uncertain. Several tax increases are provided for in the bill, most of which affect high-income taxpayers. These increases would not occur until 2022 or later. If a bill passes before the end of the year, some taxpayers will want to consider the differences between the 2021 and 2022 rules and possibly take action in 2021.
Are there any tax issues due to COVID-19?
Tax changes due to COVID-19 have eased. For example, in 2020, taxpayers who had received unemployment benefits were able to exclude part of this income. For 2021, the rules return to normal: unemployment benefits are fully taxable.
About Kimberley Key:
Kimberly Key is a PWC Professor of Accounting in the School of Accountancy at Auburn University’s Harbert College of Business. His research interests focus on the areas of earnings management, state taxation, and the effect of taxes on asset prices. His work has been published in the Journal of Accounting and Economics, Journal of the American Taxation Association, Issues in Accounting Education, Journal of Accounting Education, and tax practice-related journals. She has received three teaching awards from the School of Accountancy and is a past president of the American Taxation Association.