With the holidays upon us, you may be thinking tax season is months away and there is plenty of time to prepare. In reality, tax season is right around the corner and now is a great time to ensure that you’ve taken advantage of all of the tax-saving strategies available to you.
Although you may not be able to utilize all of them, taking a short break from holiday shopping to ensure that you’ve done everything possible to lower your tax burden and claim all possible write-offs/deductions is probably a good use of your time — wouldn’t you agree?
With that in mind, here are a few of the most effective strategies available for the 2021 tax season.
Maximize Your Education Tax Credits
The Lifetime Learning Credit and the American Opportunity Tax Credit allow qualified individuals to prepay 2022 tuition expenses for an academic term that begins in March 2022, including the tuition payments when calculating the 2021 credit.
This means that if you are entitled to the credit and have not yet reached the 2021 maximum for qualified tuition and related expenses paid, you may increase your credits by purchasing early 2022 tuition ahead of time.
Keep in mind that if you’ve been paying tuition all year in 2021, you may not be eligible to take advantage of the ability to prepay. However, if your child just started school this fall, it will likely provide you with at least some additional assistance.
Take Advantage of Charitable Deductions
Most people are familiar with the fact that, if you choose to itemize, you can deduct contributions to your favorite charity or religious organization. What many people don’t know, however, is that they may select to pay all or a portion of their 2022 planned giving in 2021 in order to boost the amount they deduct in 2021.
While this may not be appealing to those who itemize every year, if you alternate between taking the standard deduction and itemizing the next year, you may save a significant amount of money.
As an added bonus only for the 2021 tax year, if you take the standard deduction and don’t itemize your deductions, you can claim a tax deduction of up to $300 (or $600 if filing jointly with your spouse) for cash contributions you make to qualified charities throughout 2021.
Convert a Traditional IRA to a Roth IRA
If you are under the age of 72, it may be tax-wise for you to convert your traditional IRA into a Roth IRA.
This is especially beneficial for those whose income was low in 2021 — as you would be able to move the assets currently in your traditional IRA into a Roth IRA at a much lower tax rate than if the conversion was made in a higher-income earning year.
Maximize the Amount You Save in Your Health Savings Account
If you have a Health Savings Account (HSA), it can be beneficial to maximize your tax-deductible contributions and tax-deferred earnings in the year before they will lower your taxable income.
This makes sense as those who are currently unemployed or under-employed may not need the deduction now, but could benefit from having more tax-deferred funds available to them in 2022.
Keep in mind that if you reach medicare age (65), HSA can be taken out without any penalties.
Prepay Your State Income and Property Taxes
Many people are aware that if you are not subject to the alternative minimum tax and itemize deductions, you may deduct both your property taxes and state income (or sales) taxes up to a maximum of $10,000 per year but few know that it is also possible to increase the amount deducted on your 2021 return by prepaying some of the taxes by December 31, 2021?
The process is fairly straightforward: if you are self-employed, pay your fourth-quarter state estimated tax installment in December (due in January) and increase your deduction, or if you’re an employee ask your employer to raise the amount of your state withholding by a fair amount.
The same holds true for your real estate taxes: you can deduct your first 2022 payment in 2021 if you make it in 2021.
That said, keep in mind that the so-called SALT limit – the maximum deductible amount of all types of state and local taxes – is $10,000. So don’t prepay state taxes if you could potentially go over the $10,000 cap.
Take Advantage of the Annual Gift Tax Exemption
Last on our list is the Annual Gift Tax Exemption.
You may give tax-free gifts up to $15,000 to as many individuals as you’d like without incurring any gift tax or having to file a gift tax return.
If this is something that appeals to you, remember that this tax-free exclusion amount remains in effect from calendar year to calendar year and it does not carry over — so you will need to make any gifts by Dec 31st.
With so many tax-saving strategies available, it’s hard to know which ones will benefit you the most. We can help you figure out where your money is going and what steps need to be taken before we get closer to April 15th.
Contact us today for a free consultation with one of our experts who specialize in taxation and accounting!