2021 tax tips to act on now to improve your bottom line
The last month of the year means a lot of things: holidays, parties, boules and more. It is also an opportunity to do year-end tax planning.
Now you have a good idea of where you will end 2021 in terms of earned income and available deductions. Here are some general year-end tax tips that apply to federal returns:
Calculate your deduction situation
A key decision at the end of the year is to analyze your expenses to see if you might be able to itemize them. Otherwise, you would take the standard deduction, which has become very widespread since the tax reform in 2017, with around 90% of taxpayers going in this direction. The most common itemized deductions include property taxes, mortgage interest, state income taxes, charitable donations, and medical expenses.
For 2021, the standard deduction is worth $ 12,550 for singles and $ 25,100 for married couples applying jointly. Those numbers are up $ 150 and $ 300, respectively, from 2020. That’s $ 18,800 for heads of households, also up $ 150. If your eligible expenses exceed these thresholds, you will probably want to itemize them.
Determine your tax bracket
Another aspect that can help guide year-end planning is determining your income bracket. Think of racks as buckets with water. As your income grows, you fill the first bucket, where the lower tax rate applies, and then move on to brackets with increasingly higher tax rates.
The lowest rate is 10% for singles earning $ 9,950 or less, or $ 19,900 or less for married couples. Rates cap at 37% for singles with incomes over $ 523,600 and married couples over $ 628,300. In between are rates of 12%, 22%, 24%, 32% and 35%.
Rate analysis can help determine whether you want to defer or speed up income or deductions. For example, if taking a higher paying job in December can take you from the 12% bracket to the 22% bracket, it may be worth the wait until January.
However, “If your income is relatively low, you may be able to increase it to fill the 10%, 12%, or even 22% brackets,” said Kelli Peterson, Chartered Accountant and Certified Financial Planner at Savant Wealth. Management. With tax rates likely to rise in the years to come, it might make sense to “maximize the lower brackets now,” she said.
Take into account optional expenses
A lot of people don’t have a lot of wiggle room at the end of the year when it comes to income. Most likely, you won’t take a new job in December, for example, although you might have the option to carry a bonus or other income back into January.
There are often more possibilities to increase deductible expenses. You probably can’t do much to significantly change your mortgage interest, for example, but there are other options such as charitable giving.
The rule of thumb is that you can deduct donations to qualifying charities. The amounts you donate, along with other deductible expenses, might be enough to push you into the specific range. If you donate a lot of money or want to donate non-cash assets, the tax rules can get complicated. Internal Revenue Service publication 526 provides details.
Special donation rules may apply
A special note for almost all taxpayers is that a special deduction for cash donations of up to $ 300 per person is available ($ 600 for married couples), without the need to itemize them. Cash donations include those made by check, credit card, etc.
For seniors who don’t need to live off all of their retirement money, doing a qualified charitable distribution or QCD can be helpful. If you are at least 70 and a half years old, you can choose to take advantage of this provision, which allows you to directly transfer up to $ 100,000 from an individual retirement account to one or more charities.
You will not get the deduction that would normally apply, but the money is not recognized as taxable income, which can help meet the minimum distributions required and avoid taxes on some Social Security payments and possibly higher health insurance costs. Congress changed RMDs to start at age 72, but QCD eligibility still begins at age 70 and a half, Peterson noted. Seniors can use this provision to cover part or all of their RMD, she added.
You may also want to open a donor-advised fund, especially if your income has jumped and you need a year-end write-off. These vehicles allow you to donate cash or other assets like appreciated stocks, claim the deduction now, and then take some time to decide which charities to recommend to support. Meanwhile, account balances grow tax free.
Many investment firms, brokerage houses, and charitable foundations will open one on your behalf. Some, like Fidelity Investments, do not require a minimum contribution amount.
Medical deductions are also possible
Medical deductions remain advantageous. The tax reform was supposed to raise the floor of the medical deduction to 10% from 7.5%, meaning people who retailed could only deduct health expenses in excess of 10% of their income. But Congress temporarily lowered the threshold to 7.5% and then made it permanent at that level, making it easier to deduct medical and dental expenses.
To get past that threshold, you may be able to time surgeries or other procedures, taking them this year or next. Many health expenses are deductible, including unreimbursed medical expenses, hospital expenses, prescription drugs, certain transportation costs, certain insurance premiums and more. IRS Publication 502 goes into details.
“Bundling” is the idea of skipping some deductible expenses in one year (and taking the standard deduction) and then doubling the next one to get into the retail range. This can be done more easily with flexible and optional expenses like charitable giving, but medical expenses can also help you overcome the hurdle.
Capital gains might be worth catching
Many investors sit on paper profits in taxable stock market accounts or on gains on other assets. It is often wise to delay the sale to defer paying taxes on a gain. But if your taxable income is modest, it can be profitable to make some gains and pay them this year, especially if you benefit from the 15% rate on long-term capital gains or even the 0% rate.
Long rates apply to assets held for more than one year; otherwise, the earnings are taxed as ordinary income at generally higher rates. This 0% rate could apply if your taxable income for the year is less than $ 80,800 for married couples or $ 40,400 for singles.
Conversely, it might be wise to make losses. As a general rule, if your losses exceed your gains for the year, you can deduct up to $ 3,000 from the excess regular income, carrying unused amounts forward to future years. It is best to do such a “harvest of losses” at the end of the year, when you have a more complete picture of your tax situation.
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