According to The Balance, the average American who was single contributed more than 29% of their earnings in 2019 to taxes? In terms of dollars, this meant that the average person, with the salary of an “average wage earner,” was paying around $18,368. Most of these wage earners probably never took the time to focus on “Year-End Tax Planning Tips” for lowering their taxes.
It can be incredibly stressful to imagine losing so much money when paying taxes! Especially when you have family to support and tons of bills to pay such as rent, utilities, food, credit card bills and so on.
However, with utilizing Year-end Tax Planning Tips, you can make a significant dent in your taxes. In this article, we’ll review these year-end tax planning tips
- Make HSA and 401(k) Contributions
- Convert Money to a Roth IRA From Your Traditional IRA
- Schedule Your 2021 RMD
- Wait to Buy Mutual Funds
- Make a 529 Plan Contribution
- Harvest Capital Losses
- Harvest Cryptocurrency Losses
- In a Low Tax Bracket? Take Advantage of Capital Gains
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Lets learn these tips more in detail.
- 1 Take Some Tax Deductions at the Last Minute
- 2 Make HSA and 401(k) Contributions
- 3 Convert Money to a Roth IRA From Your Traditional IRA
- 4 Schedule Your 2021 RMD
- 5 Wait to Buy Mutual Funds
- 6 Make a 529 Plan Contribution
- 7 Harvest Capital Losses
- 8 Harvest Cryptocurrency Losses
- 9 In a Low Tax Bracket? Take Advantage of Capital Gains
- 10 Need Additional Help With Your Year-End Tax Planning?
Take Some Tax Deductions at the Last Minute
One of our tax planning tips is to take some tax deductions at the last minute. By accelerating your deductions so that you’re taking them this year instead of next year, you can lower your tax bill. For example, you could contribute to a charity.
This is a good choice when it comes to making a deduction, and you’ll have control over the timing, too.
For the tax year 2021, the deduction amount is a maximum of $300 for all filing statuses except for those who are filing jointly and filing married. For those people, the maximum deduction amount is $600.
When you take some tax deductions at the last minute, there are some strategies you can use to save even more money. One of these is to donate property or appreciated stock instead of cash. By doing this, you’ll supercharge your generosity’s tax benefits.
Even better is to donate an asset that you’ve owned for at least a year. When you do this, your donation will get you a double tax benefit.
How does this work? On the date that you make the gift, you can deduct the value of the property—and you’ll also be avoiding paying any capital gains tax on any built-up appreciation.
However, keep in mind that speeding up your tax deductions could end up being a mistake if you if you’re subject to the AMT, or the Alternative Minimum Tax. So check this before making these last-minute tax deductions.
Make HSA and 401(k) Contributions
Another piece of tax planning advice for lowering your taxes by using some strategies now that the end of the year is here is to make contributions that are tax-deductible to health savings accounts and traditional IRAs.
Even though you can technically do this by April 15, 2022, when it comes to contributions for your 401(k), you can only make these by December 31 this year if you want them to count for the 2021 tax year.
If you want to take advantage of these deductions, here’s what they might look like. If you have a family health insurance plan that’s qualified and high-deductible, you can deduct a maximum of $7,200.
When it comes to self-coverage that individuals have, the maximum you can deduct is $3,600.
For anyone who is 55 years old or older, they are also eligible to get a catch-up contribution, in addition, of $1,000.
Note that there’s a cap for the tax-deductible contributions you can make to your 401(k), if it’s the traditional type, for 2021. This cap is $19,500.
Additionally, note that, for workers who are 50 years old or older, they can make $6,500, in addition, in catch-up contributions.
Convert Money to a Roth IRA From Your Traditional IRA
When it comes to withdrawals made from traditional IRAs, these will be taxed during retirement. However, when it comes to withdrawals made from Roth IRAs, these are tax-free. Additionally, there aren’t any minimum distributions required with a Roth IRA.
This can also be beneficial if you’re looking to reduce your taxes during retirement.
Fortunately, the US government will allow you to convert your money from your traditional account to a Roth account, making it possible for you to experience these benefits.
Keep in mind that, when you complete this conversion, you will have to pay taxes on the amount you end up converting. However, it’s better not to delay this conversion if you’re planning on doing it, and to do it now instead.
Schedule Your 2021 RMD
Usually, retirees who have an IRA or a 401(k) that’s traditional must take a minimum distribution every single year once they have turned 72. This is a requirement, and depending on the retirement account size, this can be a significant amount that makes your tax bill quite significant.
When it comes to meeting this requirement, you need to remember to schedule your 2021 RMD.
Last year, because of the CARES Act, RMDs were waived. However, they aren’t for this tax year. If you don’t schedule it, you would get a penalty of 50%. So remember to do this before the end of this year.
Wait to Buy Mutual Funds
If you buy mutual funds this year, you could end up paying taxes on them if they ended up within a taxable account. As a result, you could end up having to pay for dividends that are the year-end type. This could happen even if you purchased just shares.
In a situation like this, you would be paying taxes, but on a profit that you hadn’t actually seen.
If you want to avoid paying these taxes additionally, you should speak with a broker before you purchase mutual funds so you can find out when distributions will be made.
Make a 529 Plan Contribution
If you have children, you can use a 529 plan to both save on your state income taxes next year and to prepare for your children’s college expenses. The majority of states offer a deduction on state income tax if you make a contribution to a plan that’s state-sponsored and you’re a state resident.
Note, as well, that some states will also offer this deduction on contributions made to any 529 plan.
Even though you won’t get this type of deduction on federal taxes, the money you contribute to these plans grows tax-free. Additionally, withdrawals are tax-free if you use them for education expenses that qualify.
Harvest Capital Losses
Do you own any stocks that ended up losing money? In this case, one of our tips for lowering your taxes is to sell these stocks and get a deduction on your federal taxes. In this case, the maximum amount you can get in deductions is $3,000.
You can apply this money to your regular income taxes or offset your gains on additional stocks.
When doing this, be careful that you aren’t violating the wash-sale rule. Doing this would disallow your deduction.
According to this rule, you can’t purchase a stock that’s substantially similar or the same within 30 days after or before the sale.
Harvest Cryptocurrency Losses
Have you been investing in cryptocurrency? In this case, you could be in luck. There’s a loophole in the wash-sale rule because it doesn’t currently apply to cryptocurrencies. For this reason, you should think about harvesting any losses you’ve had on cryptocurrencies.
Additionally, you can do this and then buy a similar or the same cryptocurrency.
Like with other investments, you can use cryptocurrency losses to offset regular income taxes or capital gains.
However, keep in mind that this loophole is likely to not be available soon. For this reason, you should harvest cryptocurrency losses this year before it isn’t possible to take advantage of this loophole.
In a Low Tax Bracket? Take Advantage of Capital Gains
If you have any stocks that have significantly appreciated, the end of this year is a good time during which you can sell these stocks. This is especially a good idea if you’re in the 12% or 10% tax bracket, as your capital gains tax could be zero.
After you do this, you can repurchase the stocks. This will minimize the tax amount you will have to pay on future gains and will reset the basis.
Are you not in a low tax bracket? If you’re harvesting losses as well, then it could be a good idea to sell your winning stocks so you can reset the basis.
An additional reason to sell investments at the end of the year is so you can rebalance your portfolio. If you aren’t sure whether this is necessary or not, we recommend speaking with a professional.
Need Additional Help With Your Year-End Tax Planning?
Now that we’ve reviewed the year-end tax planning tips for lowering your taxes, you might need additional help. Maybe you want to learn about more ways to lower your taxes in advance before the end of this year or you want to learn bout tax-saving strategies to use next year. We recommend you focus on year round tax planning instead of doing it towards end of the year.
Whatever help you need, we at Tax Savers Online can help. We provide tips on how to save taxes in the US, and we explain many tax issues such as the 1031 Exchange.
To learn more about how we can help you, learn about how to avoid an audit from the IRS now.