As the year comes to a close, it is time to start thinking about 2021 taxes. Every year, individuals as well as small businesses neglect to take full advantage of deductions and ways to save on taxes. However, following these simple year-end tax planning tips can make a huge impact on your tax bill in April.
1. Delay Payments and Pay Expenses Early
If it works into your business’ budget and you file taxes on a cash basis, small business tax accountants will encourage delaying income at this time until January. If possible, send out invoices later so payment will not come in until the new year. If you are an employee, find out if you can defer your year-end bonus until the next year. That way, you won’t be taxed on it this season. These small ways of minimizing income at this time of year can impact how much you owe later on.
In addition, any work-related expenses made now can be claimed as tax deductions for this year. If you are planning a work trip or a larger purchase, now is the time.
2. Harvest Losses to Lower Tax Liability
If you regularly monitor your portfolio, selling investment assets currently at a loss can lower your tax liability. The losses can then reduce the taxes you owe on any capital gains. You can use up to $3,000 of these losses against other income. These losses can also be carried over until following years.
3. Contribute Maximum Amount to Retirement
If you have a tax-deferred retirement account, such as a traditional IRA or 401(k), contributions reap countless benefits. The payments compound over time and use tax-free money, so over time, this investment in your future is highly valuable.
However, before you even reach retirement age, your contributions also have tax benefits. The contributions you make lower your taxable income, so setting aside as much as possible for your budget, or at least meeting the amount your employer will match, will decrease your tax bill.
4. Donate to Charity
A simple way to claim more deductions at the end of the year is by donating to charity. This season is known as the season of giving, and with that sentiment, many donate at this time; however, contributing now results in a tax write-off for 2021. For those filing jointly, you can write off up to $600 this year for contributions made, while all others can write off up to $300, even if you are not itemizing deductions.
5. Spend Remaining FSA Funds
Many employers offer FSA accounts, which have advantages if used in the right way. They take pre-tax dollars and hold them for any out-of-pocket healthcare costs you may incur. Because it is taken out of your salary in this way, enrolling lowers your taxable income.
The problem some participants run into is any funds left in the account after December 31st will be taxed, and you could potentially lose the money left in the account. Before the year’s end, schedule any routine appointments, fill your family’s prescriptions, and use the remaining funds to purchase any of FSA-approved items.
By planning ahead with these steps, and working with your local accounting firm in Charlotte, you can enter tax season feeling confident and prepared.