5 Ways to Shrink Your Tax Bill Before the Year Ends
The new year is almost here but you can still make a few adjustments that can have a significant impact on how much you pay in taxes next spring.
Taxes aren’t based on your gross annual income, but instead are applied to your adjusted gross income (AGI) minus either the standard deduction or allowable itemized deductions, according to the Tax Policy Center. By lowering your AGI, you can reduce your taxable income for the year. Here are five strategies to help cut your 2021 tax bill, as reported by USA Today.
1. Defer Your Bonus
Expecting a year-end bonus? If this extra income is enough to bump you up into the next tax bracket and increase your taxable income, you can delay this income until the beginning of the new year, TurboTax CPA and tax expert Lisa Greene-Lewis said to USA Today. If your work can delay your bonus until January, it won’t be considered part of your 2021 income.
2. Expedite Deductions, Defer Income
There are several deductions that are recognized in the year they’re paid. For example, you can deduct mortgage interest if you own a home and if you make an extra mortgage payment before the end of the year, you can claim the interest on that payment on your 2021 return.
However, if you purchased a home after Dec. 15, 2017, you can deduct up to $750,000 in total mortgage interest instead of $1,000,000 for homes purchased before then, USA Today noted.
If you itemize your deductions, you can make a donation to a qualified charitable organization by Dec. 31 to potentially reduce your tax bill. Under the CARES Act, you can take advantage of the standard deduction for cash donations of up to $300 made to a 501(c)(3) organization or $600 for married couples filing jointly, Greene-Lewis says.
4. Contribute to a Retirement Account
Make a contribution to a 401(k) or a traditional IRA. If you’re self-employed and contribute to a SEP IRA, Greene-Lewis explains that you can contribute up to the lesser of 25% of your net self-employment income or $58,000 for 2021.
5. Sell Losses
An investment that has lost value may help you offset your taxable income using a strategy called tax-loss harvesting. You can sell underperforming investments and if losses exceed your gains, you can potentially offset up to $3,000 of your ordinary income. Any amount over the $3,000 can be carried forward to future tax years, according to Hayden Adams, Director of Tax and Financial Planning for the Schwab Center for Financial Research.
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