There Is Still Time to Reduce Your 2021 Taxes.

In part 2 of our 2-part series on Tax Filing Tips, LKNConnect’s Bob Schwinn, CPA, shows us the opportunities still available to reduce your 2021 taxes. Click here to read part 1, where he details the filing deadlines and how various tax credits could apply to you.

There are still a few opportunities to reduce your taxes even once the tax year is over. Depending on your income level and whether a retirement plan at work covers you and/or your spouse, you may be eligible to make a tax-deductible traditional IRA contribution for the 2021 tax year. The traditional IRA contribution limit is $6,000 ($7,000 if you’re age 50 or older), and a contribution could be made for the 2021 tax year until April 15th, 2022.

Taxpayers with a high deductible health insurance plan may be eligible to set up a health savings account (HSA). Contributions to an HSA can be tax-deductible, and contributions for the 2021 tax year could be funded up until April 15th, 2022. Distributions from HSA’s can be tax-free if used for qualifying medical expenses.

Note for business owners

Forgiven PPP Loan Update — Exempt from North Carolina Tax

For taxpayers who owned a business and had received a Paycheck Protection Program (PPP) Loan, the North Carolina Senate Bill signed into law in November 2021 included a favorable provision. Before the bill was passed, taxpayers with a forgiven PPP loan essentially had to report income on their NC tax return equal to the amount of loan forgiveness. North Carolina’s treatment of the forgiven PPP loans differed from the federal treatment. For federal purposes, forgiven PPP loans were not subject to tax.

Taxpayers who timely filed their 2020 tax returns and reported the forgiven PPP loans as taxable for NC purposes should consult with their tax advisor and consider filing an amended tax return for 2020. For taxpayers reporting the forgiveness on their 2021 tax returns, they should confirm with their accountant that they are not paying federal or NC tax on the forgiven PPP loan.

Planning for 2022

If, after preparing your 2021 taxes, you owed tax or received a large refund, you may want to revisit your w-2 withholding for 2022. If estimated taxes are required for your particular tax situation, you should seek your accountant’s advice for payments that should be made during 2022. If you owe taxes with your 2021 tax returns, you may want to increase the tax withheld from your paycheck. If you received a significant refund, you might want to decrease the tax withheld from your paycheck so that you receive a larger take-home paycheck throughout the year.

Depending on benefits offered through your employer, there could be opportunities to reduce your taxable income and thereby reduce your 2022 taxes. If your employer offers a traditional 401(k) plan, you may be able to make 401(k) contributions each paycheck, which would reduce your taxable income throughout 2022. If you pay for childcare, you may want to check with your employer to see if they offer a Dependent Care Flexible Spending Account (FSA). Contributions made to a Dependent Care FSA can reduce your taxable wages. Funds contributed to the Dependent Care FSA could then be used to pay for qualifying dependent care expenses.

As Albert Einstein once said, “The hardest thing in the world to understand is the income tax.”

The concepts discussed in this article are complex, even for seasoned tax accountants and CPAs. The tax law has many rules and exceptions, which can be applied differently for each family based on their specific filing situation and income level. Please check with your accountant on the applicability of the above items for your particular situation.

Best wishes for a successful filing season and the rest of 2022!

Article and photos courtesy Robert Schwinn, CPA
Robert Schwinn, CPA

Robert “Bob” Schwinn is a CPA licensed in North Carolina. He is the founder of SCHWINN CPA PLLC, a CPA firm specializing in serving small businesses and their owners. Bob has over 16 years of tax & accounting experience and works with clients in a variety of industries. Please visit www.schwinncpa.com to learn more.

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