With the year coming to a close, it’s not too late to review your year-end tax decisions with these 8 tips.
1. Just as you may want to defer income into next year, you may want to lower your tax bill by accelerating deductions this year. For example, contributing to charity is a great way to get a deduction. And you control the timing.2
2. Don’t miss out on valuable tax deductions if you can itemize rather than claiming the standard deduction. According to the IRS, about 75% of taxpayers take the standard deduction, but could be missing out on valuable tax deductions if they can itemize.2
3. Consider year-end charitable distributions. You can use RMDs for qualified charitable distributions in order to reduce your taxable income and adjusted gross income. Donor Advised Funds can be a great option during years of extraordinary income.2
4. Maximize retirement contributions, if you qualify, by investing in Traditional or Roth IRAs to provide tax advantages for yourself and provide more time for your money to grow.2
5. If you’re over age 72, don’t forget to make a plan to take RMDs from retirement accounts by year-end to avoid penalties.1
6. Sometimes accelerating tax deductions can cost you money… if you’re already in the alternative minimum tax (AMT) or if you inadvertently trigger it. Originally designed to make sure wealthy people could not use legal deductions to drive down their tax bill, the AMT is now increasingly affecting the middle class.2
7. Income is taxed in the year it is received—but why pay tax today if you can pay it tomorrow instead? Of course, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income could push you into a higher tax bracket.2
8. Connecting with your advisor is the best strategy to ensure you are on track with your taxes. Your advisor will guide you and answer any questions you may have.
Investment advisory services are offered through Trek Financial, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.
IRS.gov, November 18, 2021
Turbotax.intuit.com, November 16, 2021