No matter how much you earn, you would probably rather pay less money to the IRS than more. And the good news? If you play your cards right, you can lower your tax burden for 2021 and prepare for a strong 2022. Here are some essential tax measures to take before the end of the current years.
1. Unload losing investments
Your goal in buying stocks should be to make money. But sometimes, otherwise strong companies can see their finances deteriorate.
It is one thing to own stock in a company that is just having a bad year. But if you have a stock in your portfolio that’s losing money year after year and has been underperforming the overall market, it might be time to unload it. And if you do that before the end of the year, it could do wonders for your 2021 tax bill.
Whenever you sell stocks at a loss, that loss can offset capital gains. And even if you haven’t sold any shares at a profit this year, you can still use a capital loss to offset up to $ 3,000 in ordinary income. As such, dumping lost stock over the next month could be to your advantage.
2. Maximize your 401 (k) – or get as close as possible
You have until next year’s tax filing deadline to put more money into your IRA. But if you’re saving for retirement in a 401 (k) plan, all 2021 contributions must be in your account by December 31. Since these contributions are considered payroll deductions, now is the time to apply to have more of your paycheck allocated to your savings plan – before you run out of time.
Of course, you may not be able to maximize your 401 (k). This year, savers under 50 can contribute up to $ 19,500, while those 50 and over can contribute up to $ 26,000. If you are earning an average salary, these are difficult thresholds to reach. But in this case, do your best to inject as much money as possible into your 401 (k). This will serve as a good tax break (assuming you are funding a traditional 401 (k) and not a Roth) and also allow you to have more money for the future.
3. Use your FSA
If you’re putting money into a flexible spending account, now is the time to start spending your balance. Some plans offer a grace period that allows you to use your balance at the start of 2022 or carry some of your funds over to your next plan year. But it’s not something you have to rely on, as not all plans offer it.
Instead, take a look at your balance and find out how to best use it. If you’re sitting on $ 300, maybe now is a good time to refill a bunch of recurring prescriptions, get new contact lenses, or stock up on over-the-counter drugs that qualify for FSA.
4. Increase your charitable giving
If you plan to itemize your 2021 tax return, the more money you donate to charity, the more money you can save. If you have the financial flexibility to donate more money to charity in the coming weeks, it might be beneficial to make those donations now rather than wait until the New Year.
That said, it’s not just monetary donations that can serve as a tax deduction. If you clear your cupboards to prepare for an influx of Christmas presents, you can donate used goods to charity and claim them on your taxes as well. Just be sure to keep receipts and records of your donations.
Before we know it, 2021 will be over and the new year will begin. Take these important tax steps while you can. They could translate into a world of savings.