As the economy continues to reel from the effect of the Covid-19 pandemic, many taxpayers continue to look for ways to save. Are you looking for ideas on how to lower your 2021 tax bill?
Here are 3 strategies to discuss with your tax advisor before year-end.
1. Can I accelerate deductions or defer income?
If you itemize, you may be able to pay additional 2021 tax deductions by December 31. Certain tax deductions are claimed in the year of payment, such as the mortgage interest expense deduction. So, if you make your January 2022 mortgage payment in December, if you itemize, you can deduct the interest portion on your 2021 tax return. Other itemized deductions to consider pre-paying are charitable donations and property taxes.
Deferring taxable income until 2022 will also reduce your taxable bill. If you’re expecting a bonus at work, for example, and you don’t want the income taxed in 2021, ask if your employer can hold off on paying you until January 2022. Your employer may be able to accrue the deduction for 2021, and, at the same time, this will allow you to defer reporting the bonus income until 2022. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2022. Also, don’t forget your bad debts if you are on the accrual basis of accounting. If you have old customer accounts receivable in which you will never collect, the IRS allows for a tax deduction under certain conditions. If you are unfamiliar with bad debt deductions, your tax advisor should be able to guide you through the IRS rules.
Keep in mind that these timing strategies only delay taxable income. Any taxable income deferred for 2021, will be taxable income for tax year 2022. We would not advise that you pursue this approach if you expect to be in a higher income tax bracket next year.
2. Have I maximized my 2021 retirement contributions?
Do you have a qualified pre-tax retirement account such as an IRA, 401(k) or SEP plan? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts. For 2021, the IRS allows for pre-tax contributes up to $19,500 for 401(k) plans, and up to $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of their net income (but no more than $58,000) to a SEP IRA. These pre-tax retirement plans allow you to reduce taxable income in the year the contribution is made, with taxable income reporting postponed to the year when the funds are withdrawn (i.e., in retirement years). Consider discussing your retirement contribution strategy with your financial and tax advisors. If you are 50 years or older, don’t forget to take advantage of the additional “catch up” deferrals you are entitled to make.
3. Can I harvest investment losses?
If you have losing investments, now may be a good time to cut your losses. Generally, capital losses from investments can be used to offset taxable gains realized this year on a dollar-for-dollar basis. If you have more losses than gains, the IRS allows you to apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years. Consider discussing with your financial and tax advisor whether leveraging your capital losses before year-end makes sense.
There’s still time
These ideas are only a few of the year end strategies that still may be available. Please reach out to your Wegner CPAs tax expert to discuss these tax-saving strategies in more detail.