Year End Tax List

There may be several months left until the end of the year, but it is never too early to think about end-of-year tax planning. Below are some tips to potentially lower your tax bill this year.

Increase contributions to retirement plans. One of the best ways to reduce your taxable income is to contribute the maximum amount possible to a retirement plan. Contributing to tax-deferred retirement accounts also allow contributions to grow tax-deferred over time. If your employer sponsors a retirement plan such as a 401(k) plan, they may possibly offer a match on contributions as well. In 2021, individuals can contribute up to $19,500 to a 401(k) plan, and individuals age 50 and older can contribute an additional $6,500 for a total of $26,000. If your employer doesn’t sponsor a retirement plan, contributing to an IRA is another good option to save money for retirement and reduce your taxable income. In 2021, individuals with earned income can contribute a maximum of $6,000 to an IRA and an additional $1,000 if you are age 50 or older.

Contributing to a Health Savings Account (HSA) can also lower taxable income. Contributions to HSAs are not subject to federal income taxes. Earnings to an HSA from interest and investments are tax-free as well. Finally, distributions from an HSA to pay for qualified medical expenses are tax-free.

Realize losses on stock in any non-retirement accounts. Selling stocks at a loss can offset capital gains and income taxes. It may be advisable for us to meet to discuss any year-end trades you should consider making. Capital losses can be carried forward to offset future gains and up to $3,000 of losses can be deducted in the current year.

Deferring income to the future can help you reduce taxes this year. Individuals who are self-employed may have a greater opportunity to take advantage of this strategy. Income is taxed in the year it is received – you will still have to pay the taxes on the income at some point, but this strategy might be useful to individuals who anticipate having a lower income next year.

Tax deductions are a great way to lower your tax bill, such as donating to charity. There is an extra potential benefit for those who choose to donate appreciated stock instead of cash as well.

If you happen to have investments such as stocks, mutual funds or ETFs that experience losses, you can use those losses to offset taxable gains for the year. The offsets of gains are allowed on a dollar-for-dollar basis. If your losses exceed your gains for the year, you also have to ability to use up to $3,000 in losses to offset other income. Additional losses can be carried over year after year.

Opt into using or increase the amount you set aside for next year in your company’s flexible spending account; don’t forget that these funds are generally use it or lose it.

For people with children under age 18, and especially under age 14 consider contributing to a qualified tuition plan (Section 529 plan) Unlike a Coverdell Educated Savings Account (CESA) there are no AGI limits on contributions to 529 plans. However, distributions of earnings from a 529 plan are tax-free only if used to pay for higher education expenses (college and above). 529 beneficiaries can be changed if funds remain in the plan and the original beneficiary no longer has any need.

Make annual exclusion gifts before year-end to save gift tax and estate tax. You can gift $15,000 per person ($30,000 as husband and wife) in 2021 to an unlimited number of individuals free of gift tax. However, you cannot carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.
We’d be happy to sit down with you and discuss some tax-reduction strategies you can take before the New Year. Because we work with many executives, managers, employees and retirees, we are very knowledgeable about various compensation plans and benefit offerings (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of our clients and you can ask them how working with an advisor has helped them.

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Year end tax planning