It may be that taxes are not as big an issue for you because the COVID pandemic reduced your household income or your business sales, so you assume you’ll pay less in taxes. If so, you’re not alone. The Fidelity Investments 2021 Financial Resolutions Study found that two-thirds of Americans experienced a financial setback in 2020, for a variety of reasons, and 38 percent predicted that they’d be in survival mode in 2021. Even with the world slowly recovering in 2022, the pandemic is still lingering, and still affecting taxes.
Whether you’ve just been hanging on for the last eight months or 2022 was a good year for you, taking actions now that will affect your financial obligation that will come due next April should be high on your to-do list. Here are some suggestions on how to do just that.
Take Advantage of Section 179
No one likes dealing with depreciation. However, section 179 in the IRS code allows you to write off the entire purchase price whether purchasing or financing qualifying equipment or software for the current tax year up to $1,050,000. Though larger businesses may benefit from it, this tax legislation was specifically designed to help small businesses invest in themselves.
This doesn’t mean that you can only take the deduction if you buy equipment that costs less than $1,050,000, but the benefits start to diminish when you spend more than $2,620,000 total. The IRS also requires that you begin using the equipment—used or new—in 2022 to take the deduction.
Inventory Your Inventory
Now is a good time to take a close look at your inventory. Are there products that are doing well? You might buy more before the year ends so you can claim a business expense. On the other hand, is there inventory that hasn’t sold and is unlikely to? If you have items that have lost their value, they can have an impact on the balance sheet and income statement. Best to write them off.
Consider Putting off Some Income
Are you due a bonus? You might consider putting that off until next year if your company allows it. Of course, you don’t yet know what your income and expenses will be for 2023, but at least you’ll be able to start including that as income at the beginning of the year and you’ll have plenty of time to make plans to offset it.
If you’re a freelancer or independent contractor and you know that your income will far outweigh your expenses in 2022, you might wait until the end of December to send out some invoices. That way, they won’t be included in the 2022 income.
Look For More Deductions
How well do you know Schedule C and all of the business expenses you can claim? It’s better to think about this now instead of during tax preparation so you can assemble any documentation needed and have it handy. Are you considering your home office space, as long as it’s devoted to business use? Legal and professional fees? Bank fees and business interest? Advertising and promotions? Business insurance?
Then there are charitable contributions to qualifying organizations, which must be made by December 31, 2022, to be deductible for this tax year. Single filers who do not itemize can claim up to $300 in donations, while married couples filing jointly can take up to a $600 deduction. Individuals who do itemize can give up to 100% of their adjusted gross income (AGI) and claim it on their tax returns. C Corporations are limited to cash donations equaling up to 25% of taxable income.
Put More Money in Your Retirement Accounts
This, of course, benefits you in two ways. For one, your retirement will be better funded the more you contribute to your 401(k)s, IRAs. etc. For another, you’ll also benefit from a tax break by maxing out your contributions.
“Bunch” Deductions
When you bunch deductions, you claim as many deductions as you can in a given tax year so you can itemize. You take a standard deduction the next year, then continue to alternate between the two. This is often done with charitable donations that you make at the beginning and end of the year, but it can work with deductions like medical expenses and property taxes.
You may have heard some of these suggestions before and either didn’t think they would help you or weren’t sure how to use them in your tax preparation, but your goal should be to pay as little tax as is legally possible. The amazing team at Soukkala Consulting can help you with this. If you want to have a conversation about any of the ideas mentioned here before the end of the year, contact us! We’ll also be available to consult with you and prepare your taxes next year. Let us know now if you’d like to do that so we can get you on the schedule.