(Adam Lévy)
You might not have to pay your taxes until April, but making a few cash moves before the end of 2021 could lower your final bill. And if you’re really on top of your finances, you’ll take action that will take your future tax obligations into account as well.
If you’re looking to increase your Uncle Sam’s repayment next spring and for years to come, here are five things you should consider doing right now.
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1. Harvesting capital losses
If you have investments that have lost value since you bought them, you might consider selling them and incurring a loss. You are allowed to offset any capital gains you realized this year with losses, as well as up to $ 3,000 in personal income. Unused losses are carried forward to subsequent years.
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But what if you don’t really want to sell? Unfortunately, you can’t sell a stock, ETF, or mutual fund and redeem your stocks the next day. This violates the blank sale rule, which states that if you buy back a substantially similar asset within 30 days of a negative sale, it is as if the sale never happened.
what do you can to do, however, is to buy a slightly different but mostly similar asset, such as a stock in the same industry, or instead of an ETF that tracks the S&P 500, one that tracks a total stock index.
Interestingly, the wash sell rule doesn’t apply to cryptocurrency. So if you have a loss on a crypto investment, you can record the loss and buy back the currency quickly. Note that there is currently legislation in Congress that would apply the wash sale rule to crypto.
2. Harvesting of surplus value
The capital gain crop follows the same idea as the capital loss crop, but you are intentionally reserving a capital gain instead. Why would someone deliberately take a capital gain today when they could defer it for years to come? Because long-term capital gains benefit from a preferential tax rate, including a 0% tax bracket.
If you expect your 2021 adjusted gross income to fall below $ 40,400 for a single filer or $ 80,800 for a couple filing jointly, you have the option of locking in capital gains at a rate of 0% tax. While this won’t lower your tax bill for 2021, it does will lower your taxes in the future when you go to liquidate the asset.
The rule of selling at a discount does not apply to sales at a profit. You can freely repurchase shares immediately after the sale, and you will always record the gain on your taxes.
3. Pension plan contributions
If you have additional savings that you can live on right now, you may want to consider increasing your 401 (k) salary deferral. The contribution limit for 2021 is $ 19,500 for those under 50, or $ 26,000 for those 50 and over.
Contributing more to your 401 (k) may be your only opportunity to reduce your adjusted gross income before the end of the year. And lowering your AGI below certain thresholds can help you benefit from tax credits such as the child tax credit or the 2021 stimulus plan. Thus, not only would you benefit from the tax deduction for your contribution to a retirement plan, but you would also save money by qualifying for more credits.
If you haven’t contributed to an IRA this year, you have until April 15, 2022 to make that contribution. If you’re eligible for a deduction for a traditional IRA, that’s another way to lower your AGI and potentially get more tax credits, like the savings credit or ACA credit.
If you go over the income limit to contribute to a Roth IRA or think you could do so, you may want to do a backdoor Roth IRA before the end of the year. Current congressional legislation would close the Roth backdoor loophole starting in 2022. So while you could make a contribution to the IRA for 2021 until the tax deadline, you won’t be able to do so. Roth backdoor after Dec 31 if the law doesn’t change before it’s passed.
4. Charitable donations
Even if you don’t itemize your deductions in 2021, you can still get a tax benefit for your charitable donations. For 2021, you can deduct up to $ 300 for single filers or $ 600 for a married couple filing jointly without itemizing. If you itemize, you can deduct the total amount of charitable donations made in 2021.
The most tax-efficient way to give to charity is to donate assets that are valued like stocks. When you donate shares, you do not have to pay capital gains tax and you can write off the full value of the shares at the time of donation. You thus benefit from additional tax savings in addition to the tax deduction.
One strategy you could use is to load your charitable donations in 2021 and itemize your deductions. In 2022, you could give a lot less, but take the standard deduction. Or you can donate to a personal donor-advised fund this year and donate at a later date.
5. Prepay itemized deductions
If you have bills that could be considered an itemized deduction, it may be a good idea to pay them a little earlier to ensure you can claim the deduction in 2021. For example, you might be better off paying a big one. medical bill in December even if it is not due before January. Likewise, you could pay your taxes or property taxes estimated by your state in December instead of waiting for the deadline in 2022.
That said, the limit on state and local tax deductions remains at $ 10,000, and current congressional legislation would increase that limit. So, in fact, it may be worth delaying these payments if they go over that threshold and you plan to itemize them in 2022.
It is important to note that the standard deduction will increase in 2022 by $ 400 for single filers and $ 800 for common filers, so it will be more difficult to reach this standard deduction threshold with itemized deductions. Therefore, paying for these items in 2021 could save you more in taxes than paying for them in 2022.
Pick the fruits at hand
Optimizing your taxes to the last penny is not a practical exercise. It is better to follow these tips and apply the ones you can easily get and give yourself the most important tax benefits. But with a little planning, you can save thousands of dollars in taxes this year and for years to come.
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