Auburn University accounting professor offers tax tips on year-end financial and tax planning
Auburn University Professor Kimberly Key provides advice on year-end financial and tax planning. She serves as the PWC Professor of Accounting in Auburn University’s Harbert College of Business.
What do you recommend when it comes to year-end financial and tax planning?
All of us should periodically review our finances, which in December naturally will bring tax issues to the forefront. Conversations with family members and financial and tax advisors is empowering because people can feel that they are in control of their current and future finances. Broad questions include: How will or might this year and next year be different? Are any life changes on the horizon (like retirement, getting married or having a baby)? Are any one-time financial windfalls or costs expected? These life changes can have significant financial and tax ramifications.
Small changes are always possible. For example, increasing a monthly investment in a work-related or individual retirement account or college savings account—which have tax-related benefits—could be feasible. Although not directly related to taxes, someone with credit card or other debt should consider increasing monthly payments. Following through on ideas is critical.
What do you recommend when it comes to specific year-end tax deductions?
2021 is a good year to make a contribution to a favorite charitable organization. Congress made a temporary tax law change to allow a $300 (unmarried filers) or $600 (married filing joint) deduction for taxpayers who take the standard deduction. The IRS estimates 90% of taxpayers use the standard deduction, so this rule affects a significant number of people.
Traditional Individual Retirement Accounts (IRAs) are good for savings and can provide current tax benefits. (A Roth IRA is good for savings too, but tax benefits are at the time of withdrawal.) 2021 contributions can be made as late as April 15, 2022, which gives taxpayers a chance to review their tax position and then decide if they want to make and designate contributions as 2021. Depending on taxpayer income, the IRA contributions could be deductible.
Are there any new deductions or developments that would affect late-year 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 early payments of half the credit. Those six months of payments—July 2020 through December 2020—have been made to people who appear to be eligible for the credit based on prior tax return data. There will be a reckoning when tax returns are completed because 2021 income affects the eligibility for and the amount of the credit. Many will receive the remainder of the credit when they file 2021 tax returns, but others could find out they are not actually eligible for all or part of the credit. In that case, taxpayers could find themselves with an amount due to the IRS or a smaller refund.
The ultimate outcome of the Build Back Better legislation that has passed in the House but not the Senate is uncertain. Several tax increases are in the bill, most of which affect higher-income taxpayers. Those increases wouldn’t occur until 2022 or later. If a bill passes before the end of the year, some taxpayers would want to consider differences between 2021 and 2022 rules and possibly take action in 2021.
Are there any tax issues due to COVID-19?
Tax-related changes due to COVID-19 have subsided. For example, in 2020, taxpayers who had received unemployment compensation were able to exclude some of that income. For 2021, the rules are back to normal: Unemployment compensation is fully taxable.
About Kimberly Key:
Kimberly Key serves as the PWC Professor of Accounting in the School of Accountancy in Auburn University’s Harbert College of Business. Her research interests are primarily in the areas of earnings management, state taxation and the effect of taxes on asset prices. Her 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 School of Accountancy teaching awards and is a past president of the American Taxation Association.
Auburn University is a nationally ranked land grant institution recognized for its commitment to world-class scholarship, interdisciplinary research with an elite, top-tier Carnegie R1 classification, life-changing outreach with Carnegie’s Community Engagement designation and an undergraduate education experience second to none. Auburn is home to more than 30,000 students, and its faculty and research partners collaborate to develop and deliver meaningful scholarship, science and technology-based advancements that meet pressing regional, national and global needs. Auburn’s commitment to active student engagement, professional success and public/private partnership drives a growing reputation for outreach and extension that delivers broad economic, health and societal impact.