Even though there is a short amount of time between now and the end of the year, there are still many financial decisions you can make before 2021 that can have a significant effect on how much you pay in taxes next April. Watch the video or continue reading for 5 tips on what you need to do now to cut your tax bill in 2021.
Check your withholding
If you were someone that had a large tax bill this year because you didn’t have enough money withheld from your paychecks, you might be able to make a change now so you don’t have the same financial burden next April. An easy way to find out where you stand is to use the IRS’s Tax Withholding Estimator. Then, work with your employer to make sure you have all your ducks in a row before you ring in the new year.
Pay your 2021 bills now
People who are planning on itemizing, rather than taking the standard deduction, should try to pay their deductible expenses now, like medical bills, 2021 spring tuition, mortgage payments and state taxes that are due in January. These moves could reduce your federal tax bill come next April.
Max out your pre-tax retirement savings
Pretax contributions to your retirement savings will lower your take-home pay and reduce your tax bill. As 2021 quickly approaches you might want to consider allocating a little bit more of your paycheck to your Retirment savings to take advantage of this tax reduction.
Open a donor-advised fund
When you put your money into a donor-advised fund, you are able to deduct the entire contribution in the year you make it. This could be a great step to take if you are looking for ways to jump from the standard deduction to itemizing in the spring. With a donor-advised fund you are also able to decide later how you want to donate your money to grants and charities that are near and dear to you. And lastly,
Donate cash to charity if you take the standard deduction
This is a great way to help people in need right now while also keeping your tax bill low in 2021. This year the CARES ACT stimulus bill enacted a one –time $300 above the line deduction for cash contributions to charity. This is very appealing if you are someone who plans on taking the standard deduction in April.
To learn more about all of these tips and to hear what other things you can be doing before we close out 2020, reach out to us and we will put you in touch with a tax professional.