5 Ways to Reduce Your Tax Burden in 2021
Believe it or not, the end of the year is fast approaching, but there is still time to potentially reduce your tax burden for 2021. Below are some year-end tax saving ideas:
Fund your retirement plan.
Within your employer sponsored plan, are you making the largest contribution you can? Are you at least maximizing the employer match? If you are over 50, consider the additional catch-up provisions. Have a traditional IRA? If you are eligible to make a deductible contribution, you may be able to reduce your tax burden. (This will be affected by your eligibility for a workplace retirement plan, your spouse’s, and your overall income situation). If you own a business, you may be able to make a significant contribution by establishing and funding a retirement plan for your business.
Do you have a Health Savings Account at work?
While an HSA’s primary role is to serve as a savings account to offset the cost of high-deductible health plans, you can deposit pre-tax dollars (or deduct your contributions), and the money grows tax-free—similar to an IRA or 401(k). Invest your HSA funds wisely, and spend them only on qualified medical expenses. These accounts can be a great way to put aside a bit more for retirement.
Offset capital gains with losses.
Look at your taxable investments for realized gains this year and forecasted gains distributions from any mutual funds holdings. There is still time to offset these by realizing a commensurate loss (this can be short or long term), which could reduce or even eliminate the realized gains. You can also use up to $3,000 in additional losses to offset against ordinary income. You may hold positions that now have diminished expectations, no longer fit your strategy, or that perhaps can be replaced later without violating the wash-sale rules. Remember, the wash-sale rule states that your realized loss will be disallowed if you buy the same security or a “substantially identical” security, within 30 days before or after the date you sold the loss-generating investment. Don’t let the tax-tail wag the dog, but if it makes economic sense to consider, do so.
Considering a charitable donation?
If you itemize your tax return, you can take a deduction for donations completed during the year. Don’t wait until the last minute, as the involved parties can get caught up in late requests. If you have made a pledge, be sure you complete the actual contribution. For IRA holders over age 70 1⁄2, you are eligible for qualified charitable distributions (reach out to your investment consultant to learn more). Or if you have a highly appreciated equity position in a taxable account, consider donating the shares in-kind, allowing yourself to avoid capital gains vs. selling the position, and donating cash. Remember, to keep your tax adviser in the loop.
Organize all your tax records!
Including taxes paid, medical expenses, and then check your address or linked bank account with the IRS. Each year, there are literally thousands of refunds that are undeliverable, due to wrong addresses or old banks accounts on file.
Maybe there’s an idea or two here that you can use. If you would like to discuss these or any other matter related to your finances, give us a call.