6 Year-End Tax Strategies to Reduce Your 2021 Tax Bill

With just a few weeks remaining in 2021, time is running out on these year-end tax planning strategies. Consider making one or more of these moves that could potentially reduce the amount you’ll owe with your 2021 federal return. Of course, everyone’s situation is different, so consult a CPA to make sure these strategies make sense given your personal situation.

Charitable Contributions
Usually, you must itemize to deduct amounts contributed to charitable organizations, but changes in tax law put in place last year because of the pandemic made it easier for all taxpayers to donate to charity. Even if you take the standard deduction, you can deduct up to $300 in cash donations in 2021 ($600 if you’re married filing a joint return). If you decide to donate, make sure you’re giving to a qualified charity.

Estimated Payments
People often forget to update their withholdings when they go through big life events like marriage or the addition of a child to the family. Consider filling out a new W-4 form and giving it to your employer to ensure the correct amount of taxes are being taken out of your paycheck. That’s important for avoiding an underpayment penalty. If you think you might owe a significant amount of tax, you can also send an estimated payment by mail or through the IRS’s online portal before year-end.

Retirement Contributions
Money contributed to a pre-tax retirement account such as a traditional 401(k) or traditional IRA could help you significantly reduce the amount of tax you owe. If you can afford it, you might try to contribute the maximum to each type of account. In 2021, workers under age 50 can contribute up to $19,500 to a 401(k) and up to $6,000 to an IRA. The limits are a little higher for workers over age 50.

This is an area where you may have a little more time than the waning days of December. Some types of retirement accounts allow contributions through April 15 of next year to be designated as 2021 contributions. The rules regarding these types of accounts can be complex, so consult a professional if you’re unsure about your options.

Harvest Losses on Investments
If you realized gains on some of your investments in 2021, you may owe capital gains taxes because of those transactions. To offset these taxes, you might consider selling an underperforming investment that would make you realize a loss to offset the realized gain. In a typical tax loss harvesting operation, you would subsequently repurchase a similar investment after the sale to maintain the risk and diversification goals of your investment plan. Once again, the rules regarding these types of transactions can be very complex, so consult a professional if you’re unsure.

Delay Income
This strategy isn’t as easy to implement as some of the others for most people, but if you can delay income until after the end of the year, you could save a bit in income taxes. If you’re income is already high in 2021, you may benefit from pushing some income into 2022. This is especially true given the IRS has announced it is adjusting 2022 tax brackets upward because of inflation.

If you decide to take advantage of this strategy, make sure that you don’t run afoul of the IRS’s “constructive receipt” rules. For example, you can’t simply delay depositing a check you received in 2021 until 2022 to delay recognizing the income for tax purposes.

Prepay Expenses
The corollary to delaying income is accelerating expenses. This strategy can be especially powerful if you own your own business or are self-employed. Consider buying and paying for items you’ll need for your business soon before the end of the year. Note that the IRS allows businesses to deduct those expenses that are ordinary and necessary for your business. Also note that there are special rules when it comes to larger purchases, like equipment and vehicles, etc. Remember that almost all personal (i.e. non-business) expenses are not deductible.

Interested in learning more? Want to get a jump start on your 2021 tax preparation? Schreiber Accounting and Advisory can help with tax preparation and planning services. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.