Did you know there are steps you can take to reduce your taxable income? If it’s completed by December 31, you’re good to go.
A few things to consider:
- Tax loss harvesting. You can sell underperforming stocks from a taxable account, as long as it’s not in a tax-deferred retirement plan and use those losses to reduce any taxable capital gains. A bonus, if your net capital losses exceed your gains, you can even net up to $3,000 against other income such as wages. Losses over $3,000 can be used in the future. To avoid losses deferred, wait to repurchase the same stock after 30 days.
- Peek at your estimated 2022 income. Do you have appreciated assets that you plan on selling soon? If so, look at your 2021 taxable income and compare that to your estimated 2022 taxable income. If your 2022 income looks like it may be significantly higher than 2021, you may be able to sell your appreciated assets in 2021 to take advantage of a lower tax rate. The opposite is also true. If your estimated 2022 taxable income looks like it may be significantly lower than your 2021 taxable income, lower tax rates may apply if you wait to sell your assets in 2022.
- Max out pre-tax retirement savings. December 31 is the deadline to contribute to a 401(k) plan and be able to reduce your taxable income on your 2021 tax return. See if you can earmark a little more money from each paycheck through the end of the year to transfer into your retirement savings accounts. For 2021, you can contribute up to $19,500 to a 401(k), plus another $6,500 if you’re 50 years old or older. Even better, you have until April 18, 2022, to contribute to a traditional IRA and be able to reduce your taxable income on your 2021 tax return.
- Make cash charitable contributions. On your 2021 tax return, you may contribute up to $300 in cash to a qualified charity and deduct the amount whether or not you itemize your deductions. Married taxpayers who file jointly may contribute $600. You can make your contribution by check, credit card, or debit card. Remember that this above-the-line deduction is for cash contributions only.
- Bunch deductions so you can itemize. Are your personal deductions near the amount of the standard deduction for 2021: $12,550 for singles, $18,800 for head of household and $25,100 for married filing jointly? If so, consider bunching your personal deductions into 2021 so you can itemize this year. In general, the easiest way is to bundle two years of charitable contributions into a single year. These can include gifts of appreciated stock where you get to deduct the fair market value without paying capital gains tax.