tax planning with unison Globus

Tax Planning For Individuals

After the ripple effect of the pandemic, we are nearing another tax year. To efficiently calculate your tax, it is vital to know about the changes in the legislation and crucial enactments that can come to effect in this tax season.

According to data available with the IRS, Americans filed over 154 million individual federal tax returns in 2019. Most individual taxpayers will agree that they can considerably lower their tax payables with effective tax strategies.

Hence, if you need to fetch such benefits, then you need to commence the planning early.

In general, tax planning is the process of analyzing your financial positioning so that you can contribute to the state and at the same time optimize the taxable income with adequate tax strategies.

Employing these planning techniques prior to your calculation will help you find investment avenues and deductive areas that can boost your savings.

Further tax planning will reduce your financial liabilities and help you comply with all the rules by diverting risks.

This method allows you to assess all the income you have acquired and categorize each into different tax brackets to get the final exact data. Since tax planning for individuals is a time-consuming affair, we have developed a guide to assist you in your accounting.

Difference between Standard deduction and Itemizing

Tax-deduction-thresholds

Standard deductions are more straightforward than itemizing. This is the reason why many choose this over itemizing. Deductions are set as per the federal requirements and change almost every year. For the tax years 2020 and 2021, the deduction thresholds are as follows:

Filing status 2021 the tax year 2022 tax year
Single $12,550 $12,950
Married, joint filing $25,100 $25,900
Married, separate filing $12,550 $12,950
Head of the household $18,800 $19,400

People usually itemize when their tax benefits exceed the benefits of standard deductions. As itemization is a time-consuming process, it is necessary to start your preparations early. You can use IRS Schedule A for claiming deductions.

General Tax Planning

To make tax planning for individuals more efficient, you need to consider using the following;
● You can purchase or sell the investments that you have incurred loss or profit this year.
● For getting taxable income, you can prepare and need to get it before December 31. In the case of contractual bonuses, you need not have to pay them until the first quarter of the upcoming year.

● Try to pay upfront to deduct charitable contributions and medical expenses with your credit card. It will help you save because expenses are the tax charged with the credit; rather than when you pay the bill. This fact means that if you charge in December and pay in January, then you can show the expenses in December.
● You can acquire new options or sell the existing ones to reduce the tax bracket this year if you get stock options.
● Self-employed individuals can send invoices or bills to clients or customers before this year.

During the initial process of tax planning for individuals, one needs to consider the following aspects:

1. Prepare your retirement plans.

Boosting your retirement contributions will help you reduce your taxable income. Thus, you can contribute to retirement by adhering to the below-stated conditions;

1) If a tax planning individual is below 50 years of age, you can give up to $19,500 in 2021 to your 401(k) plan.

2) On the other hand, if you are 50 or above, you can increase it further to $26,000 per year.

3) You can also convert your IRA to ROTH IRA to maximize your tax benefits. It will be a big save if you have enhanced your cash flow this year due to the pandemic.

4) Additionally, due to the budget deficit, there is a high chance that the government will increase tax rates to the pre-pandemic level.

5) Along with this, according to the modifications in the SECURE Act, if you have reached above 70 years of age, then it is not necessary to withdraw the required minimum distributions (RMD) from the IRA.

6) In 2020, if you are a qualified candidate, you can also fetch $100,000 as of the COVID19-related funds.

2. Health accounts

In this year, for health savings accounts (HSA), you can save up to $7,200 for a family and $3,600 for an individual. If you are 55 or above, you can make an additional save of $1,000. If you possess a flexible spending account, then remember to keep an eye so that you can save the rest of the amount.

3. Charitable contributions

Changes in the CARES Act have extended the charitable aids for 2020 from 60% of the adjusted gross income (AGI) to 100%. If you have exceeded 100%, then you can use it in the upcoming year.

Additionally, if you plan to make significant charitable contributions, you need to create a donor-advised fund to enhance your deductions. If you are aged 70 or more, you can still make contributions to the traditional IRA directly. However, it will get exempted from both your itemized deduction and gross income.

4. Net Investment Income

1) When tax planning for individuals, you also need to consider NII tax. You can make deductions if there are losses while selling property.
2) You have postponed the net capital gains.
3) You employ installment sales for huge gains for an extended period.
4) There are deferring gains according to Section 1031 exchange or donating securities to a recognized charity.
5) You can also change adjusted gross income by maximizing retirement plans.
6) Changing tax features of your investments.

Documents and records that you need

While you prepare for the end of the year financial taxes, you also need to arrange your records and documents accurately to mitigate risks. The IRS is the official body that decides whether to audit your return or not.

Usually, it takes 3 years; hence it is pivotal to keep records of your financial handling at least this time. However, you need to secure the records infinitely if you have committed any fraudulent activities or failed to file returns in the past.

You can keep the record for at least 6 years if you have underreported your yearly income by more than 25%. On the contrary, if you haven’t included the loss from a “worthless security”, then it is ideal for keeping the records for 7 years.

Typically, these records come under the category of;

1) Income
2) Home
3) Investments
4) Expenses & deductions
5) Retirement accounts

56 percent of the households in the US paid income tax in 2019 as per Statista. This figure is expected to surge with the passage of time. There is a need for proper tax planning for individuals to manage their obligations.

As tax planning for individuals can be arduous and complex, it is vital to seek professional help. Missing out on information and last-minute planning can negatively impact your year-end tax.

Read More: NFT Tax Guide For Inventors and Creators: The Ultimate Guide 2022

Additionally, there are high chances of missing out on deductible income, and to figure out this, you need the help of outsourced accounting experts.

CPA firms overloaded with the hassle of tax planning and return filing chaos can hire tax preparation outsourcing services.

Tax planning eases with the expertise of Unison Globus!

Unison Globus is an avenue for accounting professionals who have a wide range of industry knowledge and experience in preparing year-end accounting.

Our skillful accountants identify potential deductions and make tax preparation easy and hassle-free. Reach out to us and start your prep now!