More than two-thirds of Americans experienced financial setbacks in 2020, according to Fidelity. The declines were attributed to job loss, decreased household income or emergency savings drawdown.
Overall, 68% had setbacks which looked like this:
- 23% lost a job or household income
- 20% had an unexpected non-health emergency
- 18% had to provide unexpected financial aid to family or friends
- 16% had a health emergency in their family
Whether 2021 mirrored these issues for you or not, go over the year-end tax moves to save you money.
Tip 1: Defer income until next year.
Consider deferring your income if possible. For example, you may want to wait on a bonus for next year if your company allows that practice.
As a self-employed individual or someone who does freelance or consulting work, you may be able to delay sending out invoices until late December. That way, companies won’t pay you until next year.
As a retiree, you may be able to postpone retirement account withdrawals so you don’t take a tax hit. However, you must remember to meet your required minimum distributions (RMDs).
Note: Consider what your tax bracket will look like next year. You may not want to defer your income if you could push yourself into a higher tax bracket by deferring your income.
Tip 2: Max out your retirement accounts.
Pumping money into tax-deferred retirement accounts might give you the best of both worlds because you can reduce your taxable income by saving in them and you also take advantage of compounding over time when you bump up your retirement savings. Not only that, but your employer could offer a major perk by slinging money toward your account in the form of the company match.
Try to contribute the full amount — $19,500 for 2021; $26,000 if you are age 50 or older.
You can also consider contributing money to an IRA (such as a Roth IRA). You can contribute $6,000 in 2021, plus an extra $1,000 for those 50 or older and let your money grow tax-deferred. As of Jan. 1, 2021, you can make contributions toward your 2021 tax year limit until the 2022 tax day. Doing so reduces your taxable income for the year.
Tip 3: Take advantage of tax-loss harvesting.
This year-end strategy involves selling investments such as stocks and mutual funds to realize losses. You can then use those losses to offset taxable gains you may have had during the year. Selling them before year-end will provide losses to offset your gains. A few quick things to note:
- You can use up to $3,000 of excess loss to wipe out other income if you incurred more losses than gains.
- More than $3,000 in excess loss can carry over to next year.
Mutual funds typically publish an estimate of their capital gains distributions in November or December, along with the date of the distribution.
Tip 4: Identify more deductions.
Lower your tax bill by tallying up those more deductions. You can deduct up to $600 (married filing jointly) and $300 (other filing statuses) per tax return of qualified cash contributions if you take the standard deduction.
- Charities: You can contribute to any number of types of charities, such as animal, environmental, health, humanitarian relief, education, and arts and culture charities.
- Medical and dental expenses deduction: The medical and dental expenses deduction is an itemized deduction that you may take (within certain limits) for unreimbursed medical and dental expenses you paid during the year for yourself, your spouse, and your dependents.
Consider itemizing rather than claiming the standard deduction. Many people take the standard deduction when they might be better off itemizing. If your qualifying expenses exceed the standard deduction, you may consider itemizing. In 2021 the standard deduction is $12,550 for singles filers and married filing separately and $25,100 for joint filers and $18,800 for heads of household.
Tip 5: Check flex spending accounts and health savings accounts.
Flexible spending plans allow you to put part of your pay into a special account to pay for child care or medical bills.
You avoid both income and Social Security taxes on these, but you have to use them all by the end of the year. If you need to, plan to stock up on prescriptions, over-the-counter medications or get a new set of glasses to use up the funds in your account.
Health savings accounts (HSAs), on the other hand, also offer tax advantages and can help you pay for health care expenses — as long as you have a high-deductible health insurance plan. They are tax-deductible in the year you put money into them and they grow tax-free. As long as you use them for qualified healthcare expenses, you can’t get taxed. Unlike a flex spending plan, however, there’s no “use it or lose it” stipulation, so take advantage.
Tip 6: Check your withholding.
Were you stunned by your huge tax bill this year? If so, you may not have withheld enough from your paycheck. Take steps now so you don’t have another not-so-welcome springtime surprise. The IRS’s Tax Withholding Estimator can help you determine whether you need to fill out a new W-4 with your employer and increase how much in taxes you withhold from your paycheck. The IRS tool will handily tell you exactly how much you should withhold.
Make Your Moves Now
You may need to make all of these moves — not just one or the other. If you’re not sure whether you should defer income or check how much you’ve withheld thus far (it’s so confusing, isn’t it?) you may want to check with a tax advisor about your specific situation.
Source: yahoo! finance