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7 Tips for Year-End Tax Planning
7 Tips for Year-End Tax Planning
According to data from the IRS on individual income taxes in 2019, 148.2 million taxpayers earned $11.9 trillion in adjusted gross income and paid a total of $1.6 trillion in individual income taxes. To put that into perspective, for every $1 in income, that’s $0.13 in taxes.
Here’s something we all have in common—no one likes to wonder if they’re paying more than they have to for their taxes each year. Before the end of 2021, there are a few things you can do to put your mind at ease about taxes.
Revisit Your Flexible Savings Account (FSA) and Health Savings Account (HSA)
Make sure you use the funds in your FSA account before they go away. Each year the money in your FSA is reset and any leftover funds are not rolled over into the new year. Check with your Human Resources office for specific details on your company’s FSA plan.
Revisit contribution rates for HSA and attempt to increase every year until you reach the plan limit (2021 Plan Limits — $3,600 for single, $7,200 for family, with an additional $1,000 allowed for catch-up contributions). HSAs are triple tax-advantaged, meaning the money going into the HSA isn’t taxed, and no taxes are owed on earnings, or withdrawals if it is spent on qualified medical expenses. Consult with your Human Resources office for more detail on your company’s specific HSA program.
Consider Charitable Donations
Donating to a non-profit entity can help offset the amount you owe in taxes, including any funds you may receive from a Required Minimum Distribution.
Tax Loss Harvesting to Offset Gains
This strategy involves selling investments that have lost value to help offset investments that have increased in value (“gains”). Accepting the loss on investments may help you manage the taxes owed on your investment gains.
Roth conversions can be impactful when there is a gap between your taxable income and the next tax bracket. That difference can be converted into a Roth account. You will pay taxes on the amount converted, but you do not have to pay taxes when you withdraw from that Roth account. The funds in the Roth account are then allowed to grow tax-free. Please consult with a tax professional or financial advisor to review your specific situation.
There are many different types of accounts, including taxable (like a checking or savings account) and tax-deferred accounts (like a 401(k)). To minimize taxes owed, you can hold your more tax-efficient assets (like tax-free bonds and exchange traded fundss) in your taxable account(s) and your less tax-efficient assets (like real estate investment trusts and taxable bonds) in your tax-deferred account(s). This method can, in turn, help to minimize higher taxes over time. Consult with your financial advisor about specific asset location strategies for your situation.
Maximize retirement savings
There may not be enough time in 2021 to change how retirement savings can affect your taxes, but it is important to maximize your retirement savings throughout the year. The more income contributed each year to your retirement plan, the lower your taxable income becomes. Money may be contributed towards retirement on both a pre-tax and after-tax basis.
If you are 50 years old or older, consider taking advantage of catch-up contributions through your 401(k), individual retirement account (IRA), and HSA (age 55 and older). It may be beneficial to adjust your contributions to contribute the maximum amount allowed, including catch-up contributions if you are eligible to do so.
Ensuring that your dollars are allocated in the most beneficial way is important when it comes to year-end tax planning. You could be unnecessarily missing significant tax advantages depending on how, where and how much you are currently investing. Consulting with an expert on the tips above is a great way to optimize your position at tax time.
Want to read more on some wealth management tips? Check out our blog post on: Why IRA Roth Conversions Are an Effective Way to Optimize Pre-Tax Portfolios.
To ensure compliance with applicable Internal Revenue Service regulations, any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.
The materials and the information are not designed or intended to be applicable to any person’s individual circumstances. These statements do not constitute an offer or solicitation in any jurisdiction. If you are seeking investment advice or recommendations, please contact your financial professional.
Investment advice offered through OneDigital Investment Advisors, an SEC-registered investment adviser and wholly owned subsidiary of OneDigital.