We are almost at the year-end but there are still a few techniques that you may use (if you have not maxed them during the year) to reduce your 2021 Income tax.
Taxes can be complicated and stressful and you could waste your money if you don’t plan properly. Use these easy to follow tips to help minimize stress about your taxes:
Top tax tips for 2021:
- Gifts to loved ones. This year allows for individual personal gifts of up to $15,000 as a tax exclusion. If you are married, you can double this tax benefit by each gifting up to $15,000 to one or multiple recipients. The maximum gift tax exclusion is $30,000. There is no tax deduction, of course, but these yearly tax exemptions do not count toward your lifetime exemption limit.
- Dump bad investments. Harvest capital losses to offset capital gains. If you have stocks or mutual funds that you can dispose at loss, this is the time to sell them. You can use the loss to offset taxable gains dollar for dollar. There’s more good news here. You can take a deduction for up to $3,000 ($1,500 for married filing separately) in losses against your other income a year. If you have more than $3,000 in losses, you can carry them over to the next tax year. Losses can be carried over every year for the length of your life.
- Contribute maximum allowed to retirement accounts. This is one of the most important tax deductions available. Don’t miss out! Not only are you given the chance to keep your money, tax-free, but you can safely watch it grow as you prepare for your retirement. The maximum 401(k) contribution allowed for 2021 is $19,500 (or $26,000 if you are 50 or over). Contributing to an IRA is another good option. For 2021 you can contribute a maximum of $6,000 to an IRA ($7,000 if you are 50 or older). If you aren’t able to contribute the entire amount by the end of the tax year, you can still make contributions to an IRA right up until April 15. If you have reached the age when the IRS requires you to take a required minimum distribution from your traditional IRA, you still have options. You are allowed to use part of your RMD (required minimum distribution) as a qualified charitable distribution (QCD). This means that you are allowed to transfer up to $100,000 from your IRA to a qualified charity and it will not be considered taxable income.
- Donate appreciated assets. If you are planning to itemize your deductions, it’s important to consider this option to contribute to organizations that you care about. If you have appreciated assets that you have held for over a year, you can deduct the full fair market value if you donate them to a qualified 501(c)(3) nonprofit organization. These charitable gifts can include common stocks and bonds, mutual funds and other long-term appreciated securities.
- Donate small items (tangible property). There’s always someone who can use personal property (in good condition) that you are no longer using. If you haven’t already been through your closet, garage, basement, and attic to do some cleaning up, now’s the time to get motivated. Bringing your tangible property to any thrift store operated by a qualified charitable organization results in recycling of your old items and, with a receipt, a tax break for you. (Not to mention the benefit of a less cluttered closet). Remember that if you estimate the total value of your donated goods to exceed $500, you need to list name and address of the organization as well as date(s) you donated the property and if you estimate the value of your donated property to exceed $5000, then you will need a professional appraiser to validate that amount to claim the deductions on your taxes.
- Consider a Roth IRA conversion. If your tax rate when you retire will be similar or higher than your current tax rate, then a Roth IRA is a great retirement account to consider. When you retire, a Roth IRA allows you to withdraw your funds (including earnings) tax-free. For this reason, some taxpayers make the decision to convert their traditional IRA to a Roth IRA.
- Make an extra payment toward your mortgage. Not all homeowners will still benefit from this tax break since the standard deduction increased and also due to decrease in maximum allowed mortgage principal to $750,000. But if you owned a home, this is still a great itemized option. If you make an additional payment by December 31, you can add that additional mortgage interest paid deduction to your 2021 taxes.
- Take advantage of the healthcare deduction. If you plan to itemize tax deductions and have healthcare expenses that exceeded 7.5% of your adjusted gross income (a.k.a. AGI) in 2021, then this deduction is worth considering.
- If you are covered by a high-deductible health insurance plan (HDHP), contribute to your Health Savings Account (HSA). You can take a tax deduction for money contributed to your HSA by anyone except your employer. The money you take out of the account is tax-free if you use it for qualified medical expenses. You can set up a HSA through your employer, bank, insurance company, or another approved trustee. Every year, what you can contribute to the health savings account is limited. There is the $3600 contribution limit for 2021 for individuals, while family coverage doubled this amount. For people 55 years and above, there is the grace to contribute an extra $1000. Health Savings Accounts are portable, so you can keep the account even if you change employers. The money in an HSA remains in the account until you spend it.