2021 is coming to an end, but you still have time to take advantage of a few new and old tax laws to make your tax return more favorable for you.
Defer Your Income
Why pay tax on something today that you can pay tomorrow? If you think you will be in the same or a lower tax bracket next year, it could make sense for you to defer any year-end bonuses into 2022 so you don’t need to include it on your 2021 tax return.
If you’re self-employed or do freelance work, you can easily defer payments by issuing delayed bills in late December so you don’t get paid until January.
However, if you think you’ll be in a higher tax bracket for next year, deferring income should be avoided–in fact, if the option to accelerate income into 2021 is available to you, take it!
Take some last-minute tax deductions before the calendar turns over to 2022 to lower your tax bill. These include charitable donations, which allows you to control the timing of your deductions. For 2021, the amount you can deduct is up to $600 per tax return for those filing jointly, and $300 for other filing statuses.
Get creative and boost the tax benefits of your charitable donations by donating appreciated stock or property instead of cash–as long as you’ve owned the asset for longer than a year, you can deduct the property’s market value on the date of the gift, plus you avoid paying capital gains tax! Just make sure you keep a receipt to back up any contribution, no matter the amount.
“Loss harvesting” is a year-end investment strategy that involves selling stocks to realize losses, which you can use to offset any taxable gains you realized throughout the year. Your losses offset gains dollar for dollar, and if your losses are more than your gains, you can use up to $3,000 of excess loss to offset other income.
If you have more than $3,000 in excess loss, you can carry it over to 2022!
Max Out Your 401(k) Contributions
Tax-deferred retirement accounts, such as IRAs and 401(k), are one of the best year-end investments you could make for two reasons.
One, many company-sponsored 401(k) accounts feature contribution matching as a benefit, which incentivizes employees to put as much as possible into the retirement accounts.
Two, any contributions made to your 401(k) or IRA can be deducted from your taxable income for the year, which means your taxable income for the year is reduced.
Do your best to max out your contributions–$19,500 for a 401(k) and $26,000 if you are age 50 or over.
Avoid The Kiddie Tax
Some parents give their children stock options around the holidays to both help them pay college expenses and shift the tax bill on investment income from their higher tax bracket to their child’s lower tax bracket. However, with the “kiddie tax,” Congress has prevented doing just that. For the 2021 tax year, the threshold for taxing a child’s investment income at the same rate as their parents is $2,200 if they are a full-time student who provides less than half of their own support.
So gift away, but be careful if you don’t want to end up paying taxes at the same rate!
Make Your Required Annual Withdrawals
Following the year in which you reach age 72, you must start making regular minimum distributions from your traditional IRA by April 1. After that, annual withdrawals must be made by December 31, so be sure to take care of that before the calendar turns over to 2022.
If annual withdrawals aren’t made on your traditional IRA, a massive 50% excise tax is taken from the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
It is of note that this only applies to traditional IRAs, and Roth IRAs come with no withdrawal requirements.
Spend What’s Left in Your Flex Accounts
Some companies offer flexible spending accounts, which are fringe benefits that allow employees to divert part of their income into an account which can be used to pay child care or medical bills. That income avoids both income and Social Security taxes, however you must use it by the end of the year or you lose it.
If you have a flex plan and you still have money left in it, now is the time to see if your employer has adopted a grace period that allows employees to spend the money in it as late as March 15, 2022. If not, use as much as you can in the account by taking any trips you need to medical professionals or the drug store.
Contact our tax professionals today for more year-end money-saving tips!