Before you schedule New Year’s plans, don’t forget about end-of-year tax savings opportunities you can lock in now before the ball drops. You can take these five steps now to ensure you’re set up for a better tax situation when your bill is due next April.
Discuss itemization vs. standard deduction with your accountant
More tax deductions are available if you itemize your taxes versus taking the standard deduction. IRS data shows that 75% of filers take the standard deduction. The standard deduction is $12,550 in 2021 for single filers and $25,100 for married filing jointly. If your qualified expenses exceed these amounts, consider itemizing instead.
If you don’t work with a CPA, you can also run this analysis in a tool like TurboTax to see where you’re better off.
Make deductible donations
If you’re planning to clean out your closet and claim credit for what you donated, don’t forget to do so before January. Get a receipt from the organization you’re contributing to. Even if you don’t end up using this particular deduction, it feels good to give around the holidays, and it’s always better to have the option.
You can also make a cash gift to certain charities. This is a great way to get your deduction. As a married couple filing jointly, you can claim up to $600 per tax return. For other filing statuses, you could claim $300.
Max out retirement
Tax-deferred retirement accounts should always be analyzed before end of year to decide if setting aside some extra money benefits your short-term goals, too. If you have a 401(k) or Thrift Savings Plan (TSP), don’t forget about the DOD or employer match (if your company offers one). You can contribute up to $19,500 in 2021, and that number increases to $26,000 if you’re over age 50.
If you use an IRA, you can set aside up to $6,000 in 2021. That amount increases to $7,000 if you’re 50 or older.
Review side business income and expenses
If you or your spouse own a business or side hustle, this is a good time to look at your projected income for the year aligned with expenses. If you’ve been waiting to purchase some new piece of equipment or training and it would help to reduce your tax liability for 2021, you might want to make that purchase now instead of in 2022.
Discuss income deferral
If you’re on the verge of being bumped into another tax bracket, it’s important to look for ways to legally defer some income. This strategy is only recommended if you think your income will be lower next year.
If you have a side hustle or work for yourself, you might want to wait to deposit a check or send an invoice if you’re concerned about earning that income for 2021. Likewise, if you’re employed, the company might defer bonus payments until your first January paycheck. That can help to reduce your 2021 earnings.