Whether you are doing great or recovering from losses, tax planning for the end of the year can save you a lot of money on your taxes, regardless of your financial position. Your business tax attorney or personal tax attorney cannot help you take advantage of these savings unless you take these actions before the end of the year.
Tax Deductions
You can accelerate tax deductions if you have not already met your limit. Even if you take the standard deduction, you can deduct some donations. For 2021, when you claim the standard deduction, you can claim up to $300 in qualified cash contributions if you are single and $600 if you are married. You can also accelerate other expenses, such as a property tax bill due early in the year, a medical bill, or an estimated state income tax bill if it’s due Jan. 15. However, watch for the alternative minimum tax. And, if you have over $12,400 of qualifying expenses, you should itemize instead.
Alternative Minimum Tax (AMT)
If you are already in the AMT or trigger it, accelerating tax deductions could cost you more money. This tax was created to ensure the wealthy did not take too many deductions to avoid paying taxes, but the AMT is affecting the middle class more and more. The AMT is figured separately and with different rules. You pay whichever tax bill is higher. Some of the expenses deductible under the rules for normal filing, such are state/local income taxes and your property taxes, are not deductible under the AMT.
Contribute to Retirement Accounts
Make sure you invest the maximum amount allowed to tax-deferred retirement accounts. They’ll compound over time without adding more taxes. If you cannot afford to put the maximum into your 401(k) throughout the year, try to hit the amount your employer matches. If you have an IRA, your money also grows tax-deferred. And, if you are self-employed, look into a Keogh Plan.
Avoid the Kiddie Tax
If you have minor children that you still claim on your taxes, be careful of the kiddie tax on investment income. The kiddie tax laws prevent you from moving the tax on your investment income to your lower-bracketed child. If the gain is too big, such as if you give your child stock to sell for college expenses, your child might end up paying the same taxes that you do.
Sell Losing Investments
Loss harvesting is selling mutual funds and stocks at a loss. The losses offset the investment gains you realized throughout the year. If your losses are more than your gains, you can use $3,000 or less to offset other taxable income. You can carry over losses forever.
IRA Distributions
If you are over 72, don’t forget to take the minimum distributions from your IRA. The age would be 70 ½ if you turned 70 ½ before Jan. 1, 2020. If you do not make withdrawals, you pay a 50 percent excise tax on the amount you should have withdrawn. When you withdraw money from your IRA, you have the option to withhold tax from the payment, and you can set the amount. This eliminates the hassle of paying quarterly estimated taxes. This does not apply to Roth IRAs, only traditional IRAs.
Check Your W-4 Withholding
If you don’t claim enough allowances on your W-4, you might get a tax refund. However, if you claim too many, you’ll have to pay in. Because the IRS doesn’t pay interest on the money you pay in if it has to reimburse you, the ideal situation is claiming enough so that you neither pay in nor get a refund. Why let the IRS hold the money you could be investing in an interest-bearing account, retirement account, or investment account? If you accepted the advanced child tax credit, be sure you speak to a tax attorney before making any changes. You might end up having to pay some of that money back.
Contact Us for Your Tax Planning Needs
Contact a tax attorney or business tax attorney at France Law Firm to help with tax planning, your yearly taxes, and to better manage your tax bill at the end of the year.
