The end of 2021 is on the horizon, and this means that there’s still a little time left to make financial decisions and adjustments that will have an impact on your bottom line come April.
There are several steps you can take to minimize the taxes you owe before the New Year, and this is especially true if you itemize deductions, are saving for retirement, or expect a significance difference in your income in 2022.
Regardless of whether 2021 was a banner year or twelve months of squeaking by, the right adjustments now can bolster your bottom line in the weeks and months to come. So, consider these key tips that will ensure you make the smartest decisions possible when it comes to your taxes, and how much you will inevitably owe (or gain) by April 15.
Review your withholding
You can avoid the financial shock and burden of a hefty and unexpected tax bill in April by reviewing your current withholding now. The IRS’s Tax Withholding Estimator is a detailed and useful tool for this endeavor, as it will help you determine whether you should file a new W-4 form with your workplace before the end of the year to increase the amount of taxes withheld. This is an especially smart move for individuals who receive a salary or have a full-time job, and also may have had other streams of outside income over the course of 2021, such as freelance work, investment income, or unemployment insurance.
Consider your medical bills
When it comes to unreimbursed medical expenses, you can only claim a deduction for expenses that exceed 7.5% of your adjusted gross income. As such, if you had a number of medical bills this past year that were not covered by your insurance and think you might exceed the 7.5% threshold, now is the time to take a look. Keep in mind that there is still time to schedule procedures and appointments as needed before the end of 2021, to maximize this number. There are a number of eligible expenses, which includes dental and vision procedures, (such as laser eye surgery), and you can find a complete list of what qualifies via the IRS Publication 502 found here.
Pay 2022 bills in advance, while deferring 2021 income
If you plan to itemize your deductions on your 2021 tax return and want to minimize your taxes as much as possible for the past year. You can increase your deductible expenses by paying January 2022 bills earlier, such as mortgage payments, property taxes, or home office utilities.
In addition, there are several additional options for individuals who are planning to go to college in 2022, or who have a child attending college. Parents can take advantage of the American Opportunity Tax Credit by pre-paying their child’s initial 2022 semester bill, which is worth up to $2,500 for each qualifying student attending a four-year undergraduate program, and which can be utilized by married couples making a joint income of $160,000 or less. If you are planning to continue your education in 2022, consider paying any expenses in December to take advantage of the Lifetime Learning Credit on your 2021 tax return, which covers up to 20% of your expenses for tuitions, books, and other fees, (up to $2,000 total.)
Conversely, you may also be able to defer your income into the next year as well. This may be difficult for employees who receive regular paychecks on a set timeframe, but freelancers and small business owners can certainly delay invoice due dates until January in order to minimize income in 2021. This is a reminder that these adjustments will eventually roll over to the next year’s tax bill, which is something to consider if you think you may be in a higher tax bracket in 2022.
Make sure you maximize your retirement contributions
Tax-deferred retirement accounts are a great investment, and the maximum amount of contributions allowed in 2021 is $19,500, or $26,000 if you are 50 years old or older. If your employer matches your contributions, and you haven’t reached the above limits just yet, consider making a substantial contribution before year’s end to reap the most benefits now and in the future.
Maximize your charitable contributions
December is the season of giving, and if you plan to itemize your tax return, your contributions can benefit both your favorite charitable organizations, as well as your tax return. Donating items that you no longer need, such as household supplies, furniture, appliances, clothing, and even vehicles, can add up to big deductions on your return. Just be sure to get a written notice of receipt from the organization if you are donating $250 worth of goods or more and obtain a written appraisal for items valued at $5,000 or more, such as artworks or jewelry pieces.
Waters Hardy is Here for You
Above all else, remember that if you have questions about your tax situation now or in the weeks and months to come, our team of tax experts are here for you.
From year-round accounting and payroll services, to tax preparation and planning for the future, the team at Waters Hardy & Co. has the tools and expertise to provide the best results possible. Reach out to us at any time, and let’s work together to assess your unique tax and accounting affairs and create the optimal plan for 2022 and beyond.