Right now is a great time to evaluate your current tax situation and enact a few changes to improve it before the year ends. The first thing to evaluate is whether the correct amount of taxes is being withheld from your paycheck each month if you’re employed. Second, be mindful of deductions and Required Minimum Distributions if you’re over age 72.
Ways to help offset your income to lower personal taxes in 2021:
Although examining and updating your W-4 is a great start, there are a few more ways to save on personal taxes that you may want to consider:
- Save more into a pre-tax-sheltered retirement savings account
- Fully fund or increase your contribution into a flexible spending account (FSA) or health savings account (HSA)
- Determine if you’re eligible for the earned income tax credit (EITC)
- Evaluate if you qualify for the alternative minimum tax (AMT)
- Increase your deductions
- Donate money to a charitable cause
Be ‘Tax-Aware’ of these everyday situations when filing:
Stimulus Payments are Not Taxable– If you received a stimulus payment in 2021, rest assured it won’t be considered taxable income. Also, if you received more money than you qualify for based on your 2021 income, you wouldn’t have to repay the funds.
Unemployment Benefits are Taxable– Unemployment benefits are taxable income by the IRS and in almost every state. If you didn’t take taxes out of your payments, you might receive a 1099 form showing your unemployment benefits income by year-end. You’ll need to pay taxes on the amount of money you made through unemployment benefits in 2021.
Home Office Deduction- If you worked from home because of the pandemic, you might assume you qualify for the home deduction. Unfortunately, work-related expenses are not eligible for deduction if you’re an employee on an employer’s payroll. A home office deduction is only an option if you’re a freelancer, entrepreneur, or another self-employed individual.
RMDs Require Special Attention– Although Required Minimum Distributions (RMDs) were suspended for 2020, RMDs are not in 2021. Consult your financial professional to ensure you are set up for RMDs this year, or if you haven’t already taken yours, set up your distribution before the year ends.
Charitable Deductions May Save You Money– If you made charitable deductions in 2021, you could deduct up to 100% of your adjusted gross income (your total income minus other deductions) in qualified charitable deductions if you itemize your deductions. If you opt for the standard deduction, you can take advantage of the “above-the-line deduction,” which will allow you to write off up to $300 of charitable deductions you made in cash.
Meet with your tax and financial professionals
A tax review is essential while saving for retirement or once you retire and meeting mid-year helps to ensure you will achieve your ideal tax situation. Retirement is often when taxes on distributions from pre-tax retirement savings accounts hit, making pre-tax planning important. Contact us for a free consultation to help make sure you’re on track.