When it comes to your taxes, you want to save as much as possible. As December 31 gets closer, it's important to turn your attention to maximizing your ability to take advantage of tax breaks. Whether you had a great year financially or found it to be a struggle, here are some great tax strategies you should implement before year's end.
Defer Your Income
While you may at some point have to pay taxes, why do it now when you can put it off until tomorrow? By deferring your income, you can do just that. As an example, if you are self-employed or do freelance work, delaying your billing until the later stages of December will mean you won't receive payment until 2022, which lets you defer your income and pay fewer taxes now. Other ways to defer your income include taking capital gains in 2022 rather than 2021, which applies to you regardless of employment status, and deferring if you expect to be in the same or possibly lower tax bracket next year.
Last-Minute Tax Deductions
A great tax strategy to use, taking some last-minute tax deductions can make your visit to your CPA much more pleasant come tax time. One deduction you should consider is contributing to a charity, since 2021 tax rules allow you to deduct $600 per tax return for married filing jointly and $300 for other tax filing statuses. Also, if you have a property tax bill coming due in early 2022 or a hospital bill, taking deductions on these can also work to your advantage.
The Alternative Minimum Tax
Known as the AMT, you'll need to consult with your CPA ahead of time to make sure you don't accidentally trigger the AMT, since this can result in you having a higher tax bill. For example, state and local income taxes as well as property taxes are not deductible under the AMT. Thus, if you think the AMT will apply to you in 2021, it's best to not pay any installments in December 2021 that are not due until January 2022.
Take Advantage of "Loss Harvesting”
When you take advantage of "loss harvesting," you are using a year-end tax strategy that lets you sell off stocks and mutual funds for losses, then use the losses to offset your tax bill. Should your losses outpace your gains, you're allowed to use as much as $3,000 to do away with other income. Also, excess losses can be carried over year after year for as long as you live, so discuss this in detail with your CPA.
Contribute Maximum Amounts to Your Retirement Accounts
Of all the tax strategies you can implement before the end of the year that will pay off for you in a big way at tax time, contributing the maximum amounts to your retirement accounts is it. This is especially great for 401(k) plans, since your employer will match your contributions.
If you have an IRA, remember that you can make contributions all the way up until the April 18, 2022 tax filing deadline, and that for 2021 you can contribute a maximum amount of $6,000 to your IRA, and another $1,000 if you are at least 50 years old.
Dodge the "Kiddie Tax"
While it may sound relatively harmless, the "kiddie tax" created by Congress could in fact impact your tax bill more than you expected. Created so that a family could not shift its tax bill on investment income to their child's lower tax bracket, you'll need to be careful if you are considering giving your child some stock to sell off so they can pay college tuition. Should your child's unearned income exceed only $2,200, you may wind up paying taxes at your usual rates, meaning you come away with no tax savings whatsoever.
Check Your IRA Distributions
Once you turn 72, you need to start making regular minimum distributions from a traditional IRA by April 1 of the year following the year when you reached age 72. If you fail to do so, the IRS will be waiting eagerly to hit you with one of its most stiffest penalties, the dreaded 50% excise tax. This tax, which is applied to the amount of money you should have withdrawn from your IRA, can be much more than most people expect, and can take what would have been a great tax return and turn it into a disaster. To make sure you don't incur this penalty, discuss your IRA details with your trusted and experienced CPA.
Watch Your Flexible Spending Accounts
As one of the last yet very important tax strategies you should implement before the end of the year, keep a close eye on your Flexible Spending Accounts, also known as FSA.
A great fringe benefit offered by many employers, you win by knowing the money you place into an FSA avoids Social Security and income taxes. However, an FSA is also a "use it or lose it" account, meaning any money in your FSA that is not used by year's end is forfeited.
If you have quite a bit of money in your FSA that you fear may vanish before you can use it, find out if your employer has signed on to the grace period that was implemented by the IRS. If so, you'll be able to spend any money placed in your FSA during 2021 through March 15, 2022. If your employer has not adopted the grace period, you can always plan a very big shopping trip to your local drugstore.
Since some of these tax strategies can be quite complex and easy for you to make costly mistakes along the way, schedule a meeting soon with your CPA. By doing so, you can make sure you are doing your "loss harvesting" properly, avoiding the aforementioned "kiddie tax," and everything else you can to make sure that when your tax returns are prepared, you'll be walking out of your CPA's office with a smile on your face.