The fourth quarter is a busy time for everyone. As people are wrapping up their end-of-year finances, the holidays quickly approach, and before you know it, you’re ringing in a new year.
But as the year comes to a close, it’s a great time to think about the upcoming tax season and what you can do to plan ahead and keep more money in your pocket.
Read our tips below to help you plan for the upcoming tax season.
1. Max Out Retirement Contributions
If you have a 401(k) retirement account, make sure you max out your contributions this year. The contribution guidelines can change from year to year. For 2021, the maximum is $19,500 If you are under the age of 50. If you’re over the age of 50, you’re allowed a “catch-up” contribution, allowing you to contribute up to $26,000.
It’s important to max out your contributions because the more that comes out of your paycheck, the lower your income taxes will be. By reducing your taxable income, you are saving money for retirement without having to pay taxes on the funds.
If you want to adjust your contributions, contact your company’s Human Resources team to discuss the options available to you.
If you have a Traditional or Roth IRA, the 2021 IRS guideline allows an annual contribution up to $6,000 if you’re under the age of 50, and up to $7,000 if you’re over the age of 50. Make your adjustments before the end of the year to ensure you’re getting the most out of your accounts.
2. Cut Losses to Offset Gains
Another strategy for the end of the year is called “loss harvesting.” This strategy allows people to sell investments, such as stocks or mutual funds, to account for losses throughout the year. The losses will offset taxable gains earned throughout the year, causing it to offset the costs.
If your losses are more than your gains, you can use up to $3,000, but if you have more than that, you can simply carry it over to offset gains in the next year. This cycle can be repeated year after year, allowing retirement account participants to save money over time.
You can learn more about capital gains and losses here.
3. Use Flexible Spending Accounts
Many companies today offer Flexible Spending Accounts, which allow employees to set aside money into a special account to pay for childcare or medical bills. The money that is contributed to the account avoids both income and social security taxes, but also falls under the “use it or lose it” rule.
If you haven’t used all of the funds by the end of the year, then you will forfeit the excess. If you still have funds to use, consider scheduling an end-of-year doctor’s visit, getting new glasses or contacts, or stocking up on your prescriptions to ensure you use as much of your money as possible.
You can also check with your employer regarding an end-of-year grace period that the IRS approved for 2021, which allows employees to spend 2021 money through March 2022. Not every company adopted the grace period though, so make sure you verify before putting your spending on hold.
4. Make Charitable Contributions
If you make charitable contributions throughout the year, you may be able to claim them on your tax return. Make sure you get receipts because there are specific documents required for different levels of contributions, such as:
- Donation of $250 or less will require a credit card statement, receipt, or bank statement
- Donation of $250 or more will require a written acknowledgement from the charitable organization you supported
- Non-cash donations over $5,000 require an appraisal prepared by a qualified appraiser
For a contribution to qualify, it must be on the list of qualifying organizations approved by the Internal Revenue System (IRS) and be eligible for deduction. For example, helping a family in need during the holidays won’t generate a tax deduction, but giving to a non-profit organization will.
To learn about qualified organizations, forms required, and other important filing information, visit the IRS here.
5. Defer Income
Another option is to defer your income, such as an end-of-year bonus or freelance/contracting wages until 2022. By receiving these types of funds early in 2022, you won’t have to log them on your 2021 tax return, meaning more money in your pocket.
This strategy only works if you will be in the same or lower tax bracket in the upcoming year, so make sure you understand the structure before moving funds around.
There are many ways you can prepare for the upcoming tax season, but these are just a few tips to help you get started. If you get lost along the way, or need to seek additional advice, visit the Slavic401k blog for helpful resources and information.