Get your tax act together now by being more organized in the second half of 2021
Proper tax planning isn’t just for CPAs. The more organized you are now with paperwork and business practices, the better. Here are some tax tips to consider for the second half of the year.
Create a system
Whether you file your own taxes or take them to a professional, it’s always a good idea to keep the paperwork you’ll need organized throughout the year. If you want to work smarter, trade in your throw-everything-in-a-box tax prep method for labeled folders in a desk drawer or a separate file box. You could also consider using a software program. Generally, the IRS suggests you keep records for three years from the date of a filed tax return.
Good news for business meals
As more people get vaccinated and the world opens back up, now is a good time to take advantage of a temporary tax change that allows a 100% deduction for qualifying business meals through December 31, 2022. Typically, business meals are only 50% tax-deductible, but a temporary revision in 2020 allows you to claim the full meal for a limited time. Don’t forget to save your receipts and note your business clients.
Review and update your W-4 form
If you had a big tax bill this year and would prefer not to live through that again, you can change your W-4 form to increase how much is withheld from your taxes. Doing that will likely help you owe less next year. Ask your HR department for a new W-4 and make changes now so you can have more taken out for the remainder of 2021.
On the flip side, if you had a big tax refund, you can also update your W-4 form to reduce how much money is being withheld from your earnings. Getting a refund means you gave the government an interest-free loan. It also means you may be living on less than you have to. The IRS offers a federal tax withholding estimator to help people figure out how much they should be withholding.
Going back to school?
If you are thinking about going back to school or already took the leap and enrolled, you may be able to claim the Lifetime Learning Credit for graduate school or professional certificate programs, which can be worth up to $2,000 in 2021. To qualify, you must take classes at an eligible educational institution and your modified adjusted gross income in 2021 has to be less than $90,000 if you are single or $180,000 if you are married and filing jointly. And remember, tax credits are better than tax deductions, because they lower your tax liability on a dollar-for-dollar basis.
Consider a home office deduction
If your work situation changed in 2020 or 2021, and your side hustle became your full-time gig, don’t shy away from the home office deduction if you qualify. Historically, people have worried this might flag an IRS audit. But if you are an independent contractor or self-employed, and have a room (or area) in your home solely devoted to doing business, stake your claim. You can deduct a portion of rent or mortgage and other expenses that are attributable to the space that is specifically used for doing business, or you can simply deduct $5 a square foot, up to 300 feet.
File your taxes if you haven’t already
If you haven’t yet filed your taxes, get on it, especially if you are owed a refund. The only way to get a refund is to file a tax return. Plus, there is no penalty for filing after the deadline if a refund is due. Visit IRS.gov through Oct. 15 to prepare and file returns electronically.
And if you haven’t filed your taxes yet and you owe money — even if you can’t afford to immediately pay the taxes owed — you should still file a tax return as soon as possible to reduce potential penalties. The IRS offers options for taxpayers who owe the IRS, but cannot afford to pay the full amount at one time.
*This guest article is from the “Your Money Blog” in Mid Oregon’s Digital Banking Credit Savvy resource. It is made possible by SavvyMoney. “Your Mid-Year Tax Check-In: Consider these Tips for Potential Savings” by Jean Chatzky with Casandra Andrews was published in July 2021.