Just what you need in the middle of the holiday rush — tax planning activities.
Taxes may be the last thing on your mind this time of year, but think of it as a Christmas present to yourself that will make tax season a little easier.
At the end of the year, tax planning means finding those last-minute deductions, giving to charity, and otherwise making sure you are ready financially for 2022.
There’s lots to do, so let’s get to it.
2021 Standard Deduction and Itemizing
The standard deduction for the 2021 tax year is:
- $12,500 if filing single
- $25,100 if married filing jointly
This piece of information is front and center in your decision whether to take the standard deduction or if you would do better by itemizing. If your tax situation hasn’t changed much, look at last year’s tax returns.
When deciding whether to go for standard deduction vs. itemizing, consider whether you might have teetered over the edge to one or the other. Knowing whether you will itemize can help you determine what to gather, what to change, and whether you are eligible for any new deductions.
If your total miscellaneous deductions are subject to 2% of your adjusted gross income (AGI), or you're really close, consider adding more items to this category so itemizing saves you some tax liability. Alternatively, if you have no chance of itemizing this year, defer some deductions to next year. Maybe you can itemize for the 2022 tax year.
Check Your Withholding
Don’t be hit with a surprise tax bill because your employer didn’t withhold enough of your payroll this year. Use the IRS Tax Withholding Estimator tool to determine whether you need to file a new Form W-4 and increase withholdings before the end of the year. You will need:
- Your most recent pay stub
- A copy of last year’s tax return
- Access to the online tool
If you need to withhold additional wages to reduce the tax hit in April, take the amount the tool shows you and put it in line 4(c) of the W-4, and file it to get yourself caught up.
If you don’t have time, don’t worry too much. If you owe less than $1,000 after subtracting withholdings and credits, or if you paid at least 90% of your tax due for 2021 (or 100% of your tax due last year), the IRS doesn’t charge a penalty.
Pay Bills for 2022 Now, Even If You Plan to Itemize
Mortgage payments, state taxes, tuition, and Plan 529 contributions are tax deductible. If you pay for next year’s in 2021, you can use them to defray some of the tax liability for the year.
Prepay your mortgage payment and your state taxes that are due in January. Prepay the first quarter of the tuition bill for your college kid. Contribute to a 529 college savings plan before the end of the year.
Do you have a special needs family member? Consider an ABLE account. You can contribute up to $15,000 to an ABLE account, which allows people with qualifying disabilities to save money without risking their government benefits.
Both the 529 and the ABLE account are state plans, so check your state’s tax law to determine whether making these contributions benefits your tax profile.
Defer Income
Are you expecting a big bonus from work? Or maybe you have invoices yet to be sent. If so, consider deferring the bonus until January, if possible. Don’t invoice your customers until after the end of the year.
The IRS taxes income in the year it was received. If you are looking at a big tax bill already, move any incoming until after the first of the year to reduce your taxable income this year.
Monitor Your IRA Distributions
If you turned 72 by April 1 this year, you are required to take a minimum distribution from your traditional IRA. If you don’t take your RMD, you set yourself up for a heavy penalty - a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and the amount in the account at the beginning of the year.
Whenever you start making withdrawals from your IRA, consider asking the IRA custodian to withhold taxes from that amount. You decide how much, and it's completely voluntary, but you could avoid paying estimated quarterly taxes this way.
If you are the original owner of a Roth IRA, you have nothing to worry about. You are not required to withdraw money from it.
In cases where you are still contributing to a traditional IRA or pretax 401(k), you can max out contributions there to reduce your taxable income.
Did You Fund a Flexible Spending Account?
If you did, see how much is left. Most of these accounts are use-it-or-lose-it. Pretax money is placed into the account for you to use on qualified expenses. Anything left over is forfeit.
Visit the drugstore, eye doctor, and an audiologist. Spend what's left on a new set of glasses or contacts, qualifying medications, or hearing aids.
Max Out Charitable Contributions if You Plan to Itemize
Donations of clothing, kitchenware, and furniture valued at fair market value can be deducted from your taxes. Base the deduction on how much an item might sell for in a thrift or consignment shop. There are online tools that can help you determine whether you have suitable items.
Make sure you get a written acknowledgment from the charity if the value is over $250. If you donate something worth $5,000 or more, you need a formal, written appraisal.
Taking the Standard Deduction? Donate Cash to Charity.
If you expect to take the standard deduction, you can still get a tax break by donating cash to a charity.
You may have a grace period. Ask your benefits people if you can have until March 15 to spend the rest of your account. If not, then you’d better hurry and make those purchases. For 2021, you can deduct up to $300 of cash donations per person. So, you could take $600 in deductions for your household.
Meet with a Tax Advisor
If you do your own taxes, a consultation with a tax advisor is the best way to learn about ways to minimize your tax liability or set up a payment plan if you need to. A tax advisor can help you find eligible deductions and other tax savings for this year and next.
Contact Top Tax Defenders now if you want to know more about keeping more of your money from the IRS.
