2021 is almost over, but there may still be time to reduce your tax liability. These three quick strategies may allow you to reduce your taxes before the end of the year.
Accelerate deductions or defer income
Some tax deductions, such as the mortgage interest deduction, are claimed for the year of payment. This means that if you make your January 2022 payment early this December, the interest portion can be deducted on your 2021 tax return, as long as your return is itemized.
You can also reduce your taxable income by deferring income into the new year. For example, if you’re expecting to receive a bonus at work but don’t want any more taxable income this year, you can ask your employer to delay paying the bonus until January. Self-employed workers can divert revenue to 2022 by delaying their invoices until late in December.
This approach is only suitable if you don’t expect to move to a higher tax bracket next year. Reducing your income may also allow you to reduce your qualified business income deduction for pass-through entities.
Make the maximum retirement contributions
One of the best ways to avoid a higher 2021 tax bill is to pay that money to your future self. If you have any retirement accounts, including traditional IRAs, 401(k)s, SEP plans, and deferred annuities, federal tax law encourages you to make the maximum allowable contributions for this year.
Generally speaking, you can contribute up to $19,500 to 401(k)s and $6,000 for traditional IRAs for 2021. If you’re self-employed, you can contribute up to 25% of your net income to a SEP IRA as long as the total doesn’t exceed $58,000.
Use investment losses to offset taxable gains
If you lost money on investments this year, there’s still a silver lining—these losses may allow you to offset taxable gains.
If you had more investment losses than gains, you can usually apply as much as $3,000 of the excess loss to reduce your ordinary income. Selling underperforming investments before the year’s end can offset gains realized this year on a dollar-for-dollar basis. Any remaining losses will be carried forward to future tax years.
It’s not too late
These are only a few of the ways you may be able to save money on your 2021 tax bill. If you have questions about minimizing your 2021 tax liability using these or other methods, contact us.