5 End of Year Strategies to Boost Your Tax Savings
You still have time to maximize your refund or reduce your tax bill before it’s time to file your 2021 return. Follow these five steps to boost your tax savings before the end of the year.
1. Make the most of your employer’s tax-free benefits
If you have a flexible spending account (FSA) balance, find out if your employer has implemented the new rule allowing a carryover of up to $500 in excess funds. If not, use the remaining balance by Dec. 31 so you don’t lose that tax-free money.
Maximize the tax benefits for retirement savings by contributing up to $19,500 to a 401(k) and $6,000 to your traditional and Roth IRAs ($7,000 for 50 and older).
Unlike most tax benefits, any IRA contributions made up until the tax filing deadline can count toward 2019 totals if you designate them for that purpose. Anything contributed after April 15 automatically goes toward the next (or current) year. For example, if you contribute $500 to your IRA in January 2022, you can elect to have that money go toward your 2020 contribution limits and be counted on your 2020 tax return. If you contribute $500 after April 15, 2022, those contributions are automatically applied to your 2022 contribution limit and can no longer impact your 2021 tax return.
Even if you can’t reach the contribution limits, it’s still beneficial (and favorable) to contribute enough money to maximize your employer’s match.
Note: additional retirement tax benefits are available for employees with lower incomes, freelancers, and sole proprietors.
2. Be charitable
Donating cash, clothing, or any items to a qualifying nonprofit organization by Dec. 31 can reduce your taxable income if you itemize your deductions. Depending on the value of the contributions you typically make in a year, you could consider bunching your charitable donations to take advantage of the charitable deduction on your next year’s return.
What does that mean? We’ll explain.
With the increase in the standard deduction after the Tax Cuts and Jobs Act of 2017, many tax filers no longer need to itemize their deductions because the standard deduction is now more beneficial. However, if you choose to bunch your charitable contributions – meaning you combine the amount you’d normally donate over two years into one year – you could potentially bump yourself above the standard deduction amount, making it worthwhile to itemize again. Obviously, that is completely dependent upon the value of your contributions. The more significant the value, the higher likelihood that this strategy will work.
New update for 2021 – Continued from 2020, you can take advantage of a $300 charitable contribution deduction ($600 for married filing jointly) for cash donations made in 2021, which is part of COVID-19 relief established in 2020. That deduction will apply to your individual tax return even if you claim the standard deduction; you do not need to itemize. Check out student loan The CARES Act Adds a New $300 Charitable Contribution Deduction for 2020 to learn more about this deduction.
3. Pay your property taxes or mortgage payments early
Homeownership offers many tax breaks, but to maximize them, you need to make some moves by Dec. 31 to lower your tax bill.
If you haven’t reached the maximum amount of your home mortgage interest or real estate tax deduction, you can consider pre-paying your January mortgage payment or your 2020 state or local property taxes before Dec. 31. If eligible to make this move, the amount paid will increase your itemized deductions. If your itemized deductions are higher than the allowed standard deduction, you could significantly reduce your tax liability for the year that the payments are made. In this instance, if you prepaid 2021 property taxes before the end of 2020, that payment would apply to your itemized deduction value on your 2020 tax return.
In fact, if your property taxes have been assessed, you could consider pre-paying all of your 2021 property taxes to increase the value of your itemized deductions. If you think your 2021 state and local taxes will be higher than the $10,000 deduction cap, prepaying those property taxes now will allow you to take full advantage of that tax benefit.
This same strategy applies to student loan payments. If you haven’t reached the deduction limits, consider pre-paying the spring tuition or your January student loan payment before Dec. 31 to lower your tax bill. *NOTE: This does not apply to federal loans in 2021 due to the loan forbearance in place as part of COVID-19 relief.
4. Assess your gains and losses
Capital gains can be offset by capital losses to reduce your taxable income. You can also deduct up to $3,000 ($1,500 if married filing separately) of excess losses for 2020. Losses in excess of that amount can be carried forward to 2021.
When deciding whether to keep or sell assets, consider your tax brackets (find out which tax bracket you are in by using this calculator), a mix of short- and long-term assets, and investment goals.
Keep in mind:
- Capital gains are generally taxed at lower rates than other income, but short-term gains are taxed at a higher rate than long-term gains.
- Short-term gains are taxed at your highest tax bracket, so consider selling short-term losses to offset short-term gains. If all gains are short-term, look at selling long-term losses.
- Wash sale rules prohibit a loss if you buy the same stocks or securities within 30 days of selling.
5. Download your My TaxPlan
Did you file your 2019 tax return with TaxAct? If so, don’t forget to take a look at your My TaxPlan to take advantage of the tax-smart strategies recommended for your unique situation. The My TaxPlan is a free, customized report that lists actionable steps you can take to improve your tax situation for the following year. Log back into your TaxAct account to download your report and see if there are any recommended steps you can still put in motion before the end of the year to increase your refund or decrease the amount you owe. A new My TaxPlan is available after each return you file.
Additionally, TaxAct is always up to date with the most recent tax law changes and will you walk you through the filing process to help you confidently file your return. You just need to answer questions based on your tax documents, and the product will do all of the calculations for you as well as complete the appropriate tax forms. You’ll also be served ProTips throughout the process, which offers quick guidance on tax deductions and credits that you may not have known you could take advantage of on your return. All 2020 returns can be e-filed using TaxAct and are transmitted to the IRS as soon as the agency opens its doors for business in late January.
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1Your customized My TaxPlan features potential refund-growing opportunities and easy-to-follow instructions based on the information you provide for your current tax return.