Last Minute Tax-Saving Tips To Wrap Up 2021 and Prepare for 2022
Worrying so much about how much you’ll owe in taxes that you’ve searched “is the punishment for tax evasion really that bad?” There’s no reason to resort to extremes. Here are a few tips for things you can do to wrap up the year that will help offset some tax costs.
Sell Stocks That Aren’t Doing Well
If you’ve made a few investments this year and are worried about paying capital gains on stocks you’ve sold, you might consider selling other stocks you’ve bought that are on the decline to balance out those costs. This is known as tax loss harvesting, and you can use it to offset up to $3,000 in income. There are some limitations to how this works, but if done correctly, it can help you save a chunk of change.
Donate to Charity
Giving cash to a charity serves multiple purposes. You can help those in need while also lightening the load on your taxes. Choose a verified 501(c)(3) and make a donation before the end of the year and make sure to get a receipt. If you elect to take the standard deduction on your taxes, donating to a charity enables you to deduct an additional $300-600 depending on if you’re filing single or jointly with a spouse. For items whose value exceeds $5,000, you’ll need a written appraisal as proof.
Start a 529 Education Savings Account
This is a great option if you have young kids or grandkids and want to set aside money for them to use for college. Money you put into the account isn’t taxed and, if it’s used for educational purposes, there are no taxes when you take out money. Educational doesn’t solely mean paying college tuition; the money in the 529 account can be used for books, computers, tablets, or anything else that is being put to work in an academic setting. The tuition also does not need to be college tuition. Money in the account can be used to pay for private schools and trade schools as well.
Give Financial Gifts to Friends and Family
If you’re working with a large estate, one way to lessen the taxes you pay on it is to give away the money to friends and family. You’re able to give $15,000 without any federal taxes charged on it. If you pay for a family member’s medical care or tuition costs, there is no federal tax associated, no matter how much you pay. Just make sure the checks are cleared by December 31, 2021.
Deferring some income until 2022 is a good idea if you think you’ll make about the same or less in the next year. Though you probably can’t defer large amounts of your salary, you can put off once a year payments, like bonuses. If you’re self-employed, you can delay invoices until late December or early January to ensure the income isn’t reflected on this year’s tax statements.
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Max Out Retirement Contributions
Money put into a 401K isn’t taxed, so contributing as much as you can helps lower your tax burden. The maximum you can put into a 401K in 2021 is $19,500, or $26,000 if you’re over 50 years old. If you are unable to max out your contributions, one useful tip is to contribute the least amount that your employer will match if that’s an option within your company.
Don’t Forget to Pay Required Minimum Contributions
Traditional IRA accounts and 401K accounts have a required contribution if you’re retired and over the age of 72. The amount is determined by how much is in the accounts. If you do not make the required minimum contribution, you’ll be taxed 50 percent of the shortage.
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Transfer Money from an IRA to Charity
Those over the age of 70.5 can give up to $100,000 yearly from a traditional IRA to charities without being taxed, provided that it’s a direct transfer. These types of donations also count toward the required minimum contribution. Just make sure you do it with enough time for the check to be cashed before the end of the year.
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