With the end of the 2021 calendar year quickly approaching, we thought it might be helpful to remind you of some things you can still do prior to the end of 2021. Below we have highlighted different ways you can take advantage of available tax breaks:
Try to max out your 401K before the end of the year. These contributions will dollar for dollar reduce your taxable income. Individuals can contribute $19,500 in 2021 and those over aged 50 can contribute an additional $6,500 for a total of $26,000.
If you can, make your January mortgage payment in December. This will give you an extra bump in interest deduction for 2021. If you have a property tax bill due next year you can also take care of that in 2021 to take advantage of this additional tax break.
Make some last-minute charitable donations! Ensure that you get a receipt, and that the charity is a 501(c)(3). Unfortunately, donation drop-off boxes on public streets do not count. Even if you take the standard deduction, for 2021 you can still write off $300 if you’re filing single and $600 if you are married filing jointly.
Sell off any bad investments if you have capital gains. This is called ‘loss harvesting’. You can use these losses for investments that you’re sure aren’t going to bounce back to offset $3,000 of gains in the current year. If you have more than $3,000 in losses, they will roll forward to offset next years’ gains.
Consider contributing to an IRA. Technically, you have until April 22, 2022 to make IRA contributions that you can still write off in 2021. The max for 2021 is $6,000 plus an additional $1,000 if you are 50 or older. Be careful of your compensation though – this strategy only works if you make $66,000 or less as a single person, or $105,000 married filing joint.
If you have a Flexible Spending Account (FSA), be sure you spend all the money in your account. The IRS has a ‘use it or lose it’ rule, and if you don’t use it by year end, you forfeit the remaining balance.
If you’re 72 or older and have either an IRA, SEP IRA, SIMPLE IRA, or retirement account, withdraw the Required Minimum Distribution (RMD). These were waived for 2020 but are once again required for 2021, and the penalty is potentially huge. If you forget to take this, 50% of the amount that should have been distributed will be taken as the penalty.
Be sure you are having enough tax withheld from your paycheck. The penalty for underpayment of taxes and the associated interest is incredibly high.
Child Tax Credit
Remember that if you have kids, you probably got the Child Tax Credit (CTC) deposits throughout the year. If you accepted these payments, plan to receive a lower refund than you did in prior years, or even potentially owe taxes for 2021.
Work With A CPA
Think about finding yourself a good CPA. Taxes are complicated this year due to child tax credits, at home offices and expenses, and other constantly changing tax laws. It might be worth spending a little bit more money to potentially save more on taxes and to know they’re accurate.
If you have any questions, please contact your financial advisor or a team member to help you better understand your options. We hope everyone has a wonderful holiday season and great start to the new year.