Now is the time to begin tax planning for your 2021 return. Here are some ideas:
Contribute to retirement accounts. Tally up all your 2021 contributions to retirement accounts so far, and estimate how much more you can save between now and December 31. If you are able, consider investing in an IRA or increasing 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). If you’re age 50 or older, you can reduce your taxable income by up to $26,000!
Contribute directly to a charity. Even 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. With a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married, you may not be able to claim your charitable donations as a tax deduction if the total of your annual donations is below these dollar amounts. As an alternative, consider donating multiple years-worth of contributions to a donor-advised fund if you have the available cash 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. If you or your spouse work and have children in daycare, or have an adult that you care for, consider using a daycare so you and a spouse can both work. This might allow you to take advantage of a larger tax break available in 2021. 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. Flexible spending accounts (FSA) and health savings accounts (HSA) allow you to pay medical and dental expenses with pre-tax dollars and reduce your tax liability. If you have an FSA, you can contribute up to $2,750 in 2021, and unspent funds in an FSA can now be rolled from 2021 to 2022. If you have an HSA, you can contribute up to $3,600 if you’re single and $7,200 if you’re married.
If you have questions about any of these tips, or if you need help with tax planning for 2021, please contact our office so we can help.