Tax season is quickly approaching, but it’s not too late to do some end-of-year planning that may well reduce the federal and state income tax you’ll have to pay come April. But you need to act quickly. Virtually all of the following tax reduction tips must be implemented by December 31, 2021.
Check Your Withholding Status
If you’re receiving a salary as an employee, either regular or self, and got hit with more federal income taxes this year than you thought you would, the problem may be your withholding status. Check the current W-4 you have on file with your employer. If you’re married filing jointly and the W-4 shows that your employer is withholding the maximum amount for two people, you may wish to change this to the single taxpayer withholding rate. You can even elect to withhold an additional amount.
Admittedly, either of these changes will reduce the amount of your take-home pay and won’t really help you for purposes of your taxable income this year. However, it can ensure that you will have sufficient withholding in future years so that you won’t have to come up with a big cash payment.
Consider Paying 2022 Bills Now
If you plan to itemize expenses on your 2021 tax return, it may be wise to pay some anticipated 2022 bills now. These can include such things as the following:
- Mortgage payments
- College tuition payments for your son or daughter
- State income taxes
Also consider scheduling medical, dental and vision appointments and procedures before December 31 so as to be able to deduct more unreimbursed 2021 medical expenses.
Contribute to a 529 College Savings Account
If you have a child who is approaching college age, consider setting up a 529 college savings account for him or her and contributing to it now. If you choose your state-sponsored 529 plan, this could save you substantial state income taxes.
Establish a Health Savings Account
If you don’t already have one, consider setting up a health savings account. An HSA is a great tax-saving vehicle for the following reasons:
- Your contributions to it are tax deductible.
- Interest income and capital gains generated from it are tax-free.
- Money you withdraw from it for qualified medical expenses are likewise not taxable.
Switch Money from Your Traditional IRA into a Roth IRA
Establishing a Roth IRA and funding it with some of the money now in your traditional IRA will ensure that this money will grow tax-free from now on. Two caveats, though. Switching too much money could bump you into a higher tax bracket, although you can spread the conversion over several years. In addition, if you’re two years away from signing up for Medicare or already on it, you’ll pay more for your Medicare Part B if your adjusted gross income is over a certain amount.
Establish a Deferred Sales Trust
Finally, if you own a highly appreciated asset that you’d like to sell, contact Reef Point today to see how a Deferred Sales Trust (DST) can allow you to sell or otherwise dispose of this property while deferring your capital gains taxes.