Year-End Tax Planning Strategies Accountants Should Know

View all blog posts under Articles | View all blog posts under Online Master of Accountancy

Accountant in a suit shaking hands with two clients.

Taxes are an important and unavoidable financial aspect of life for both individuals and businesses. To minimize tax liability, accountants must think strategically when helping a client close out the tax year. Tax planning strategies for individual taxpayers and businesses will differ. However, accountants in all cases must be aware of changes to tax laws and regulations, when those changes will go into effect, and how those changes may affect clients.

As more individuals and businesses rely on accountants for tax planning strategies, more students may consider pursuing advanced education to achieve success in the tax profession. An excellent place to start is to explore programs such as an Online Master of Accountancy, which is structured to help students gain the knowledge and skills to create and oversee effective tax planning strategies.

What Is Tax Planning?

Of the many questions that clients ask their accountants, one of the most frequent is “What is tax planning?” Answering that question starts with understanding that the end goal with tax filings is to pay the least amount legally possible, or being “tax efficient.” However, being tax efficient requires a lot of financial maneuvering, knowledge of the tax codes, and strategy — hence the need for tax planning.

When planning a client or company’s taxes, an accountant performs a detailed analysis of their finances, looking for areas of opportunity such as tax credits and deductions. An accountant’s expertise in tax law and regulations makes them uniquely qualified to put together the proverbial pieces of the tax puzzle in a way that reduces a client’s tax liability to the minimum. 

Tax Planning Strategies for Individuals

Tax rules that took effect in 2018 as a result of the Tax Cuts and Jobs Act of 2017 brought about multiple changes for individual tax filers. Considering that this was one of the largest reforms to the tax code in the past three decades, it caused accountants everywhere to revisit and rethink year-end tax planning strategies.

Under the new law, individual tax filers generally have lower income tax rates, a higher child tax credit, and a lower alternative minimum tax (AMT). Increases in the standard deduction mean that fewer individual taxpayers will find it advantageous to itemize their deductions. Accountants may advise clients to “bunch” their deductions — to combine two years’ worth of charitable contributions in a single year, for example — to benefit from itemizing.

Future Planning

Tax planning strategies for individuals can also relate to retirement accounts, mortgages, and capital gains. Individuals can reduce taxable income by depositing money into a 401(k) or IRA account. The money in these retirement accounts won’t be taxed until it is withdrawn. Changes in the allowable home mortgage interest deductions may affect consumers’ decisions on borrowing.

To strategize for a deduction, individuals should understand the new tax reform pertaining to specific mortgage ranges. They may also take advantage of an opportunity to defer capital gains on investments in designated opportunity zones, according to Accounting Today.

Additionally, there have been some major updates to the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Most notably, the required minimum distribution age increased from 70-and-a-half to 72. For someone under the age of 59-and-a-half who is experiencing financial hardship as a result of COVID-19, the 10% penalty normally incurred for early distribution is waived.

As part of the American Rescue Plan Act (ARPA), taxpayers with an annual income of less than $150,000 receive the first $10,200 of their unemployment benefits tax-free. There’s also good news for those with student loan debt: From 2021 to 2025, student loan debt forgiveness will not be taxable.

Tax Planning Strategies for Corporations

Tax changes have also occurred for businesses as a result of the Tax Cuts and Jobs Act of 2017. For example, the act reduced the corporate tax rate to 21%, eliminated the corporate AMT, and reduced business interest deductions. However, the Build Back Better Act aims to increase the tax rate to 26.5% for any corporation making an income of $5,000,000 or more.

Because tax laws and policies continue to change, accountants and their clients need to regularly revisit their tax planning strategies. A tactic that is optimal at the end of one year may not be helpful in the following year. Tax planning strategies for corporations typically relate to concerns such as net operating losses and business interest deductions. Proposed tax laws would end net operating loss carrybacks and cap carryforwards at 80% of taxable income.

Tax Planning Skills

While pursuing a graduate degree in accountancy, students not only build on their foundation of knowledge but also develop key new skills. Accountants need several core competencies to deploy effective tax planning strategies.

  • Advanced analytical skills, including a high level of numeracy, are essential.
  • Accountants should be able to exhibit mathematical and financial knowledge.
  • Effective communication is key, as an accountant’s job includes explaining complex laws and regulations to individuals who are not experts in the field.
  • Employing effective research techniques allows accountants to stay up to date and adapt to new federal, state, and local tax laws as they evolve from year to year.
  • Accountants must be detail-oriented and well organized to optimize tax planning as they examine financial statements and prepare tax returns.

Courses for Prospective Tax Strategists

Students who are looking to become professional accountants would do well to look into Ohio University’s Online Master of Accountancy. The program’s curriculum is designed to develop the competencies that are considered essential for implementing effective tax planning strategies. The following courses are especially important for aspiring tax planners:

  • Accounting Theory and Research — This course explores foundational elements of accounting theory that relate to financial accounting and reporting. Students review existing research and learn how accounting theory applies to standard financial reporting processes.
  • Advanced Tax Planning and Strategy — This course examines the sources of current tax laws and regulations and the impact of federal income taxes on corporations, partnerships, and other taxable entities. Topics include tax planning strategies. The course emphasizes the importance of research techniques, helping students better understand and solve tax problems.
  • Professional Ethics and Communication — Students in this course identify and resolve potential ethical issues in the accounting field and examine accountants’ civil and criminal liability. Students also practice oral and written communication as applied in the profession.

Pursue a Master of Accountancy

As tax laws continue to change, accountants will remain in high demand for their expertise and invaluable tax planning strategies. The U.S. Bureau of Labor Statistics (BLS) projects the employment of accountants and auditors to grow 7% between 2020 and 2030.

Students who are interested in building on their accounting skills by pursuing an advanced degree are encouraged to explore Ohio University’s Online Master of Accountancy. Learn more about how this program and its curriculum can help students develop the knowledge and skills to achieve success in creating, communicating, and implementing effective tax planning strategies.

Recommended Readings

Accounting Jobs That Put People in High Income Tax Brackets

Advanced Accounting Careers: How to Become a CPA

Cost-Effectiveness: Comparing Financial Accounting vs. Managerial Accounting

Sources:

Accounting Today, “10 Year-End Tax-Planning Tips After Tax Reform”

American Institute of Certified Public Accountants, “Roadmap to Developing a Tax & Financial Planning Business”

Bloom Advisors, “Year-End Tax Planning: 13 Things to Do Before 2021”

EisnerAmper, “2021 Personal Tax Guide”

Forbes, “Income Tax Law Changes — What Advisors Need to Know”

Internal Revenue Service, Coronavirus-Related Relief for Retirement Plans and IRAs: Questions and Answers

Internal Revenue Service, New Exclusion of Up to $10,200 of Unemployment Compensation

Internal Revenue Service, Tax Cuts and Jobs Act: A Comparison for Businesses

Investopedia, “Explaining the Trump Tax Reform Plan”

Investopedia, “Tax Planning”

Tax Foundation, “2021 Tax Brackets”

Tax Foundation, “Build Back Better Act: Details & Analysis of the $3.5 Trillion Budget Reconciliation Bill”

U.S. Bureau of Labor Statistics, Accountants and Auditors

U.S. Securities and Exchange Commission