It’s hard to believe that we’re in the last month of the year! With 2021 coming to an end, now is a great time to make some easy and smart tax moves to help lower your tax bill and increase your tax refund when you file.
Start compiling all of your receipts for any tax-deductible expenses and sources of income because these tax tips will help you get your finances organized and save money at tax-time before the year ends!
- Defer Bonuses
If your hard work paid off and you are expecting a year-end bonus, this extra money in your pocket may bump you up to another tax bracket and increase the taxes you owe. If your bonus bumps you up to another tax bracket, you may want to consider delaying the extra income until the beginning of next year. If your boss is able to pay you your bonus in January, you will still receive it close to year-end, but you won’t have to pay taxes on it when filing your 2021 taxes.
- Donate to Charity
The holiday season is coming, which is a great time to clean out your closet and household goods for those in need. You can help someone in need and reap the benefits of a tax deduction for non-cash and monetary donations given to a qualified charitable organization if you can itemize your tax deductions.
If you volunteer at a qualified charitable organization, don’t forget that you can also deduct your mileage (14 cents of every mile) driven for charitable service. Make these donations count on your taxes by donating by December 31st. Even if you make a donation by credit card, you do not have to pay it off in 2021 to receive the tax deduction.
Typically if you make a charitable donation to a qualified charity, you can deduct the contribution if you itemize your deductions. However, under the CARES Act, there is the addition of a new charitable deduction up to $300 on your 2021 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize and claim the standard deduction. For tax year 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses. This will be something to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.
The CARES Act also temporarily eliminates the limit placed on the number of cash contributions you can deduct if you itemize your deductions. Usually, cash donations that you can deduct are limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2021 returns (the ones you file in 2022).
- Maximize your Retirement Savings
Another great way to reduce your taxable income while building your nest egg is to make a contribution to your retirement savings account. Whether you contribute to a 401(k) or a Traditional IRA, you can reduce your taxable income and also save for the future. If you are self-employed and contribute to a SEP IRA, you can contribute up to the lesser of 25% of your net self-employment income or $58,000 for 2021.
- Spend your FSA
If you have a Flexible Spending Account and have money left, get caught up on your doctor visits. While the old “use it or lose it” rule may not still apply, you may only be able to carry over $550 worth of unused money left in your 2021 FSA account at the end of the year. Your plan may also limit the amount of time you’re able to use your funds to 2 1/2 months after the end of the plan year.
- Buy Low, Sell Low
If you have a few investments in your portfolio that have gone down in value, did you know you can recognize your losses and use them to offset investment winners? To do this, you need to sell the losing investments and offset your losses against your gains recognized. If your losses exceed your gains, you can apply $3,000 of that loss against your regular income. Any extra will then be passed to the next tax year.
- Make W-4 Withholding Allowance Adjustments
If you did not have the tax outcome you were expecting in tax year 2020 or experienced life changes like having a baby, getting a pay increase or decrease, unemployment, or a new job, now is a good time to adjust the amount of taxes withheld from your paycheck by adjusting your withholding on your W-4 and refiling the form with your employer.
- Be Aware of the Other Dependent Credit (ODC)
Do you support your parents or grandparents? How about another loved one? If that happens to be you and they qualify as a non-child dependent, then make sure to take advantage of the new “Other Dependent Credit” worth up to $500, which can reduce the taxes you owe dollar-for-dollar by $500.
- Take Required Minimum Distributions (RMDs)
Taxpayers who reached age 70-and-a-half before Jan. 1, 2020, are required to take distributions (RMDs) from their individual retirement accounts. For taxpayers who reach age 70-and-a-half after Dec. 31, 2019, the RMD age is 72. Special rules apply for taxpayers turning age 72 in 2021. Taxpayers should seek assistance from an experienced tax professional with questions.
- Contribute to Section 529 Plans
Of course, there’s the benefit of saving for qualified education expenses and the earnings are not subject to federal tax, but contributions to Section 529 plans are also deductible in most states. Contributions to Section 529 plans are never tax deductible for federal purposes.
- Make Fourth Quarter State Estimated Tax Payments
Even though the deadline is not until Jan. 15, 2022, making the state payment before Dec. 31, 2021, means it may be deducted on the 2021 federal return for those who itemize. This can be beneficial if the current $10,000 SALT deduction cap has not been met.