Now is the time to begin tax planning for your 2021 return. Here are some ideas to reduce the taxes owed to the IRS:
- Contributing to retirement accounts can lower your taxable income. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can stash away between now and December 31. Consider investing in an IRA or increase your contributions to your employer-provided retirement plans. Remember, you can reduce your 2021 taxable income by as much as $19,500 by contributing to a retirement account such as a 401(k). And if you’re age 50 or older, you can reduce your taxable income by up to $26,000!
- Contributing directly to a charity can minimize your tax bill. If you don’t have enough qualified expenses in order to itemize your deductions, you can still donate to your favorite charity and cut your tax bill. For 2021, you can reduce your taxable income by up to $300 if you’re single and $600 if you’re married by donating to your favorite charity.
- Consider a donor-advised fund. You may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married. However, if you have the available cash, consider donating multiple years-worth of contributions to a donor-advised fund so you can exceed the standard deduction this year. Then make your cash contributions from the donor-advised fund to your favorite charities over the next three years.
- Increase daycare expenses as a way to reduce income tax. Good news! There is a larger tax break in 2021 for daycare expenses. If you and/or your spouse work and also provide care for a family member, consider implementing or increasing those services. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses while cutting your tax bill by $8,000. To receive the full tax credit, your adjusted gross income must not exceed $125,000.
- Contribute to an FSA or an HSA. Did you know you can pay medical and dental expenses with pre-tax dollars? If you have a flexible spending account (FSA), you can contribute up to $2,750 of pre-tax dollars in 2021. Even better, unspent funds in an FSA can now be rolled from 2021 to 2022. And if you have a health savings account (HSA), you can contribute up to $3,600 if you’re single and $7,200 if you’re married. Between the two, these can add up to a lot of tax savings in 2021 as long as you contribute between now and December 31.
Please give us a call to discuss these options and other tax planning opportunities. We’re always happy to help.