As the end of 2021 draws near, it is time to consider year-end tax planning moves. The financial decisions you make between now and the end of the year can have a significant impact come tax time. And, with higher taxes looming, this year is more important than ever. So don’t let the opportunity to save money pass you by because come January 1 it will be too late.
Here are 11 year-end tax moves to lower your tax bill:
- Check your withholding. If you aren’t withholding enough money from your paycheck, you may be able to take steps between now to avoid a higher tax bill in April. Use the IRS’s Tax Withholding Estimator to determine whether you should file a new Form W-4 with your employer and increase the amount of taxes being withheld.
- Consider paying 2022 bills now. If you plan to itemize, now is a good time to prepay deductible expenses such as mortgage payments and state taxes due in January. Other items to consider are unreimbursed medical expenses, prepaying tuition, and contributing to a 529 plan.
- Utilize the harvest tax. This tax code allows you to sell investments that have fallen below your purchase price and use the loss to offset capital gains in taxable accounts.
- Watch for capital gains distributions. Mutual funds are required to pay out shareholders any gains realized from the sale of stocks or bonds during the year. An estimate of their capital gains distributions is typically published in November or December and is based on a per-share basis. You can gauge the size of your distribution based on how many shares you have.
- Max out your pre-tax retirement savings. You can contribute up to $19,500 to a 401(k) or 403(b) in 2021. If you’re 50 or older, you can add another $6,500 in catch-up contribution. These pretax contributions will lower your take-home pay and reduce your tax bill.
- Open a donor-advised fund. Putting your money or other assets in a donor-advised fund allows you to deduct the entire contribution in the year you make it.
- Max out charitable Donations. If you itemize, donating items you no longer need can boost your deductions while helping a worthy cause. You can deduct items you donate based on their fair market value. And don’t forget, you’ll need a written acknowledgment from the organization if you claim $250 or more and a written appraisal for items valued at more than $5,000.
- Donate cash to charity. For the 2021 tax year, people who take the standard deduction can deduct up to $300 of cash donations. And if you’re married you can deduct up to $600.
- Transfer IRA money to a charity. If you are 70 ½ or older, each year you can directly transfer up to $100,000 from a traditional IRA tax-free to a charity. This is a great benefit for those who are age 72 or older because the distribution counts as your required minimum distribution. This move will reduce the size of your IRA, which will reduce future required withdrawals and your tax bill too.
- Consider a Roth Conversion. You will pay taxes on the conversion from a traditional IRA to a Roth IRA, but that money will grow tax-free in the Roth. Converting your entire IRA can bump you up to a higher tax bracket, but you can spread conversions over several years.
- Last opportunity to file jointly. If you unfortunately lost your spouse in 2021, we extend our condolences. Losing a spouse is never easy and having to work through how the loss of your loved one impacts tax time is no welcomed task. But it is the last opportunity to use the married filing jointly status, which can lower your tax bill.
As you can see, there are several tax planning opportunities to consider. To better understand which opportunities you should take advantage of you will need to work with a professional. Our team of fiduciary advisors are here to help. Schedule your complimentary retirement review with Kowal Investment Group today!
Any opinions are those of Kowal Investment Group. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Kowal Investment Group, LLC (“Kowal”) is a Registered Investment Advisor (“RIA”). Kowal provides investment advisory and related services for clients in State of Wisconsin and other states. Kowal will maintain all applicable registration and licenses as required by the various states in which Kowal conducts business, as applicable. Kowal renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion.
For additional information, please visit our website at kowalinvestmentgroup.com.
