As we head towards the end of 2021, I am sharing my favorite list of tax-saving measures that can help you reduce your tax bill for 2021. In my practice, tax rules in the US change frequently. 2021 was no exception.
I believe that proactive tax planning is essential to achieving your financial goals. Furthermore, it is the key to achieving tax alpha. For you, getting tax alpha is a process that starts from day 1. Making smart tax decisions can help you grow your wealth while being prepared for various consequences.
Today is a great opportunity for you to review your finances. There are several smart and easy tax moves you can make that can lower your tax bill and increase your tax refund. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines. Start the conversation today.
1. Know Your Tax Bracket
The first step in managing your taxes is knowing your tax bracket. In 2021, federal tax rates fall into the following brackets, depending on your taxable income and filing status. Knowing where you land on the tax scale can help you make informed decisions, especially when you plan to earn additional income, exercise stock options, or receive RSUs.
Here are the federal tax brackets and rates for 2021.
|tax rate||taxable income||taxable income|
|(Solo)||(married filing jointly)|
|10%||$9,950. So far||$19,900. So far|
|12%||$9,951 to $40,525||$19,901 to $81,050|
|22%||$40,526 to $86,375||$81,051 to $172,750|
|24%||$86,376 to $164,925||$172,751 to $329,850|
|32%||$164,926 to $209,425||$329,851 to $418,850|
|35%||$209,426 to $523,600||$418,851 to $628,300|
|37%||$523,601 or more||$628,301 or more|
2. Decide whether to itemize or use the standard deduction
The standard deduction is a specific dollar amount that allows you to reduce your taxable income. About 90% of all tax filers use the standard deduction instead of itemizing. This makes the process a lot easier for many Americans. However, in some circumstances, your itemized deductions can exceed the dollar amount of the standard deduction and allow you to reduce your tax bill even further.
Here are the values for 2021:
|filing status||2021 tax year|
|married, filing jointly||$25,100|
|married, filing separately||$12,550|
|head of household||$18,800|
3. Maximize Your Retirement Contribution
You can save tax by contributing to a retirement plan. Most contributions to qualified retirement plans are tax-deductible and will reduce your tax bill.
- For employees – 401k, 403b, 457, and TSP. The maximum contribution to eligible employee retirement plans for 2021 is $19,500. If you are 50 or older, you can contribute an additional $6,500.
- For business owners – SEP IRA, Solo 401k, and defined benefit plans. Business owners can contribute to SEP IRAs, Solo 401k, and defined benefit plans to maximize your retirement savings and reduce your tax bill. The maximum contribution to a SEP-IRA and Solo 401k in 2021 is $58,000 or $64,500 if you are age 50 and older.
if you own September IRAYou can contribute up to 25% of your professional salary.
In Solo 401k PlanYou can contribute as both employee and employer. Employee contributions are subject to a $19,500 limit and a $6,500 catch-up. The employer match is limited to 25% of your compensation for a maximum of $38,500. In many cases, a single 401k plan can allow you to save more than a SEP IRA.
a defined benefit plan There is an option for high-income earners who want to save more aggressively for retirement by exceeding the SEP-IRA and 401k limits. DB plans use actuarial rules to calculate your annual contribution limit based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the income grows tax-free.
4. Convert to a Roth IRA
Transferring investments from a traditional IRA or 401k plan to a Roth IRA is known as a Roth conversion. This allows you to switch from tax-deferred to tax-free retirement savings.
The conversion amount is taxable for income purposes. The good news is that even though you will pay more taxes in the current year, the conversion can save you a lot of money in the long run.
If you believe that your taxes will increase in the future, a Roth conversion can be a very effective way to manage your future taxes.
5. Contribute to a 529 Plan
Tea 529 Template A tax-advantaged state-sponsored investment plan, which allows parents to save for their children’s future college expenses. A 529 plan works in much the same way as a Roth IRA. You make a post-tax contribution. Your investment income becomes exempt from federal and state income tax if you use them to pay for qualified educational expenses. Compared to a regular brokerage account, a 529 plan has a distinct tax advantage because you will never pay taxes on your dividends and capital gains.
More than 30 states offer full or partial tax deductions or credits on your 529 contributions. you can get full list here, If you live in any of these states, your 529 contribution could significantly reduce your state tax bill.
Donations to charities, churches and various non-profit organizations are tax-deductible. You can support your favorite cause by paying back and reducing your tax bill at the same time. Your contributions can be in cash, household items, valuables, or directly from your IRA distributions.
Charitable donations are tax-deductible only if you state your tax return. If you make small contributions throughout the year, you may be better off taking the standard deduction instead.
If reducing your taxes is important to you, you might want to consolidate your donations into one calendar year. So, instead of making multiple charitable contributions over the years, you can make one large charity every few years.
7. Tax-Loss Harvesting
There may be volatility in the stock market. If you have stocks and other investments that have fallen significantly in 2021, you may consider selling them. The process of selling lost investments to reduce your tax liability is known as tax-loss harvesting. This works for capital assets held outside retirement accounts (401k, Traditional IRA, and Roth IRA). Capital assets can include real estate, cryptocurrencies, cars, gold, stocks, bonds and any investment property not intended for personal use.
The IRS allows you to use capital losses to offset capital gains. If your capital loss exceeds your capital gain, you can deduct the difference as a loss on your tax return. this damage is limited $3,000 per year or $1,500 if married and filing a separate return. In addition, you can carry forward your capital loss to future years and offset future gains.
8. Prefer Long Term Over Short Term Capital Gains
Another way to reduce your tax bill when selling a property is to prioritize long-term over short-term capital gains. The current tax code benefits investors who hold their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their earnings. Whereas investors with short-term capital gains will pay taxes at their normal income tax level
Here are the long-term capital gains tax brackets for 2021,
|long term capital gains tax rate||Solo||Married filing jointly|
|0%||$0 to $40,400||$0 to $80,800|
|15%||$40,401 – $445,850||$80,801 to $501,600|
|20%||$445,850 . more than||over $501,601|
In addition, higher income earners will have to pay an additional 3.8% net investment income tax.
9. Contribution to the FSA
With health care costs always rising, you can use a Flexible Spending Account (FSA) to cover your medical bills and reduce your tax bill.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) Tax-advantaged savings account offered through your employer. FSAs allow you to save pre-tax dollars to cover medical and dental expenses for yourself and your dependents.
The maximum contribution for 2021 is $2,750 per person. If you’re married, your spouse can save another $2,750 for a total of $5,500 per family. Some employers offer a matching FSA contribution of up to $500. Typically, you must use your FSA savings by the end of the calendar year. However, for 2021, The American Rescue Plan Act (ARPA) has given you entire balance in the new Year.
OfPendant Care FSA (DC-FSA)
a dependent care FSA Have a pre-tax benefit account that you can use to pay for qualified dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. It’s an easy way to reduce your tax bill while taking care of your children and loved ones while you continue to work.
The American Rescue Plan Act (ARPA) has raised the pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for calendar year 2021. For married couples filing jointly or with a single parent as the head of household, the maximum contribution limit is $10,500.
10. Child and Dependent Care Tax Credit
The increased credit for 2021 allows eligible parents to claim up to 50% of the $8,000 per child in dependent care expenses for a maximum of two children. maximum credit will be 50% of $16,000, Keep in mind that you cannot use your DC-FSA funds to claim this credit
The credit percentage is gradually reduced to 20 percent for individuals with incomes between $125,000 and $400,000, and further decreases by 1 percentage point for every $2,000 (or fraction thereof) by which an individual has an adjusted gross income of $400,000. exceeds,
1 1.. In Contribution Health Savings Account (HSA)
a health savings account (HSA) a. Have an investment account for individuals under High Deductible Health Plan (HDHP) Which allows you to save money on a pre-tax basis to pay for qualified medical expenses.
Keep in mind that HSAs have three different tax benefits,
- All HSA contributions are tax-deductible and will reduce your tax bill.
- Your investment becomes tax free. You will not pay taxes on dividends, interest and capital gains.
- If you use the account for qualified medical expenses, you do not pay taxes on those withdrawals.
Qualified high deductible plans typically only cover preventive services before the deductible. To qualify for an HSA, an HDHP must have a minimum deductible of $1,400 for an individual and $2,800 for a family. In addition, your HDHP must have out-of-pocket coverage for a single individual or up to $14,000 for a family.
The maximum contribution to an HSA for 2021 is $3,600 for individual coverage and $7,200 for a family. HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike an FSA, an HSA does not have a spending limit, and you can carry the savings forward to the next calendar year.
12. Defer or accelerate income
Is 2021 shaping up to be a good income for you? Perhaps, you can defer some of your income from this calendar year to 2021 and beyond. This move will allow you to defer some of the income tax that comes with it. Even though it isn’t always possible to defer wages, you may be able to defer a large bonus, royalty, or lump-sum payment. Remember, it makes sense to defer income if you expect to be in a lower tax bracket next year.
On the other hand, if you expect to be in a higher tax bracket tax year next year, you might consider taking in a higher amount of income in 2021.
- Tax Brackets for 2022 – January 12, 2022
- 401k Contribution Limit 2022 – January 8, 2022
- Roth IRA Contribution Limit 2022 – January 8, 2022
- Choosing Between RSUs and Stock Options in Your Job Offering – November 2, 2021
- Getting After Tax Alpha and Higher on Your Investments – June 11, 2021
- 5 reasons to leave your robo-advisor and work with a real person – May 1, 2021
- Step by Step Guide to Planning Initial Stock Option Exercises – January 29, 2021
- Effective Roth Conversion Strategies for Tax-Free Growth – June 23, 2020
- 5 smart 401k moves to make in 2021 – August 4, 2021
- tax saving ideas for 2021 – September 16, 2021
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