8 Year-End Tax Planning Strategies
With the holidays fast approaching, we’re all thinking of making holiday gift lists. While you aren’t sure which distant relatives to include, the proverbial Uncle Sam probably won’t be one of them.
As the year ends, it’s important to be mindful of options to minimize your tax burden. Just like the holidays come and go, so do planning opportunities. Below are common ways to potentially reduce your income taxes due for 2021:
1. On the subject of giving, you can deduct up to 50% of your income for charitable donations made in cash, and 30% of stock or property. Giving appreciated assets has an extra benefit, as you can deduct the full value of the asset while avoiding generating capital gains.
2. Selling assets which have dropped in value (also called tax-loss harvesting) can be a valuable way to offset capital gains elsewhere. If your losses exceed your gains, you can deduct up to $3,000 against your taxable income.
3. Deferring income owed to you is a popular way to avoid taxes on that income. Accounts receivable billed in 2022 won’t count against you even if services/product was delivered in 2021.
4. Another way to defer income is to use a tax-sheltered company retirement plan. Company provided plans like 401(k)’s will allow you to defer 2021 income (and accompanying taxes) by contributing your paycheck or bonus to their by December 31st .
5. IRA’s can be a popular way to defer income if you qualify, but you have some flexibility (until your tax filing deadline, April 15 for most people) to contribute for the prior year.
6. Owners of IRA’s who are over 72 years old are subject to annual taxable distributions known as RMD’s. However, they can direct their distribution directly to a qualified charity and avoid the income tax or 1099 altogether.
7. Health Savings Accounts (HSA’s) allow pre-tax contributions as well, but contribution limits are limited in the first year by how many months the account has been open.
8. Prepaying expenses and picking up the deduction this year may make sense for several types of business owners, if you expect 2022 will include lower tax bracket.
Finally- this is not tax advice, nor is it a comprehensive list. Everyone’s tax situation is unique to them. For specific tax advice, your should consult a CPA. If you’d like to talk about your whole financial picture, feel free to reach out to us as 530-487-1777.