5 Strategies to Reduce This Year’s Tax Bill
As 2021 draws to a close, tax planning may be the last thing on your mind. Still, now may be your last chance to take advantage of certain opportunities to reduce this year’s tax bill. Indeed, President Biden’s proposed tax plan is still under consideration. But high earners and high-net-worth individuals are likely to be impacted—possibly as soon as next year.
In addition, many equity investors have benefited from double-digit stock market gains so far this year. Consequently, now may be a good time to realize capital gains or offset them with losses depending on your earnings in 2021.
No matter your tax bracket, no one wants to overpay Uncle Sam on Tax Day. Before ringing in the new year, be sure to check in with your CPA or financial planner to determine which tax planning strategies make sense for you.
If you’re looking for last-minute tips to reduce this year’s tax bill, consider the following strategies:
#1: Max Out Qualified Retirement Contributions and HSAs
Be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans for 2021. You can also contribute up to $6,000 to an individual retirement account in 2021 ($7,000 if you’re age 50 or over). If you haven’t already maxed out your qualified retirement plan contributions, consider doing so before year-end to reduce this year’s tax bill.
In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA). An HSA can be a great way to save and grow your money for retirement on a tax-advantaged basis. In fact, these accounts offer triple tax savings. Contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses.
#2: Consider Charitable Donations to Reduce This Year’s Tax Bill
If you’re feeling charitably inclined this holiday season, consider donating to your favorite non-profit. Those who itemize may be able to deduct up to 100 percent of qualified contributions from their adjusted gross income.
Alternatively, if you own a financial asset that has appreciated significantly in value, you may want to consider donating it to an IRS-approved charity. Not all charities accept non-cash donations. However, many donor-advised funds and community foundations will take securities and other assets in kind.
#3: Review Deferred Compensation Agreements
Employees with deferred compensation agreements typically pay taxes on the money when they receive it—not as they earn it. That means if your employer pays you a lump sum per your distribution agreement, you could potentially get hit with a hefty tax bill.
While there are different ways to structure income from a deferred compensation plan, your options depend on your agreement with your employer. Your distribution schedule can usually be found in your plan documents. So, if you haven’t reviewed your plan details recently, you may want to revisit them before year-end to avoid any surprises.
#4: Explore Tax Loss Harvesting to Minimize Capital Gains
Unmanaged capital gains can eat away at your investment returns over time—specifically in non-qualified investment accounts. Fortunately, the IRS allows investors to offset realized capital gains with realized losses from other investments.
That means you can realize profits on your top-performing investments while selling poor performers to reduce this year’s tax bill. If you have substantial losses, you may be able to completely offset your gains and potentially reduce your taxable income. Note: most fiduciary financial planners proactively take advantage of tax-loss harvesting to help their clients with year-end tax planning.
#5: Delegate Tax Planning to a Trusted Financial Advisor to Reduce This Year’s Tax Bill
Tax laws are continually in flux. As a result, most busy professionals simply don’t have time to explore every opportunity to reduce this year’s tax bill. If year-end tax planning is the bane of your existence, consider partnering with a trusted financial advisor like Cooksen Wealth. We can help you take advantage of the strategies most likely to benefit you.
