It’s tax time! No, it’s not April 15th and you are not the subject of a time travel experiment gone wrong. But if you are one of the millions of taxpayers who expects to owe and wants to minimize your tax bill, or you want to maximize your refund, the time to think about taxes is before the end of the year. The fact of the matter is that once January 1st rolls around, your accountant’s hands are pretty much tied in terms of finding ways to lower your tax burden. The good news is there are things you can do now that can save you money when it’s time to file. If you want help with end-of-year taxes or any other financial issues, consider working with a financial advisor.
Check Your Stubs
If a large check was part of your income tax filing last year either as a refund or payment, you should take a closer look at what is being withheld from your pay. Ideally, this is something that you should’ve done months ago, but better late than never. Making a change in the closing months of the year may not be enough to mitigate your entire over- or underpayment, but it will certainly help. Plus, it will ensure that you’re on the right track for next year.
Feed Your 401(k)
Unlike with IRAs, contributions to your 401(k) have to be made before the end of the year (December 31st) in order to affect your tax liability. Since 401(k) contributions are made from pre-tax earnings, they provide a dollar-for-dollar reduction in your taxable income. You can contribute up to $19,500 tax-free per year up to age 50. If you are over 50, the annual limit increases to $26,000. Those limits are per person, which means married couples can double those amounts.
Look at your income for the year and if you are close to crossing into a higher tax bracket, consider asking if some of your income can be deferred until next year. This is a particularly good strategy if you’re expecting an end-of-year bonus that will move you into a higher bracket. Asking your employer to pay your bonus at the start of next year can save you thousands in taxes and provide you with 12 full months to develop strategies next year.
The 2021 tax brackets are as follows:
2021 Federal Income Tax Brackets
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|10%||$0 – $9,875||$0 – $19,750||$0 – $9,875||$0 – $14,100|
|12%||$9,876 – $40,125||$19,751 – $80,250||$9,876 – $40,125||$14,101 – $53,700|
|22%||$40,126 – $85,525||$80,251 – $171,050||$40,126 – $85,525||$53,701 – $85,500|
|24%||$85,526 – $163,300||$171,051 – $326,600||$85,526 – $163,300||$85,501 – $163,300|
|32%||$163,301 – $207,350||$326,601 – $414,700||$163,301 – $207,350||$163,301 – $207,350|
|35%||$207,351 – $518,400||$414,701 – $622,050||$207,351 – $311,025||$207,351 – $518,400|
Pay It Forward
As the holidays approach and gift giving is on your mind, consider increasing your charitable contributions as well. Tax-deductible charitable contributions are not limited to cash payments. You can donate clothes or household goods, and even cars and boats can be considered donations.
Residential tax credits for energy-efficient improvements can reduce your tax bill by hundreds of dollars. So if you’re considering a new energy-efficient hot water system, new roof or furnace, now may be the best time to have the work done.
Flexible Spending Account payroll deductions are capped at $2,750, but that is no reason not to consider making the maximum contribution for the year. Like with your 401(k), deductions from your pay are done on a pre-tax basis, reducing your taxable income. There is a significant catch here, though, and it’s that you have to spend the money you contribute on qualified health care expenses before the end of the year or risk losing your contribution. You can roll over up to $550 of your account balance to next year.
Whether the expenses are yours or one of your dependents’, paying all or part of your spring semester bill early will give you the deduction for this year’s return. Making payments for the spring now makes you eligible for the American Opportunity Credit for this year, even if the eligible student does not begin classes until the spring.
The Bottom Line
Many people don’t think about their annual income taxes until they file each year in April. Remember, though, that is when you pay the previous year’s taxes. If you want to take action to potentially lower your bill for 2021, you need to consider taking actions such as deferring income and giving to charity before they calendar officially turns over to 2022.
- A professional’s advice can make dealing with your taxes significantly easier. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to get a sneak preview of what your tax bill could look like use SmartAsset’s free income tax calculator.
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