Year End Tax Moves to Make

 With 2020 almost coming to an end, it has been an eventual year, to say the least. One thing, to keep in mind in early 2021 is taxes. Tax season takes a lot of planning and for those looking to maximize their refund next year, these are the tax moves to make before the year ends:

Deduct property tax

Property tax is an expense against rental income. Therefore, don’t forget to deduct it. Your primary mortgage property tax is also a deductible expense on your taxable income.

Review Your Retirement Contributions To Date 

The maximum 401k contribution limit remains at $19,500 for 2021. You should max out your 401(k) if you are in the 24% marginal federal income tax bracket or higher to save on taxes. Maxing out your 401k every year is one of the best year-end tax moves to make. Even though this is the season of giving, don’t forget to pay yourself first. Take a look at how much you’ve contributed to your retirement accounts so far to date, and make additional contributions to the maximum. If you only have one retirement account and it is already maxed out, check if you’re eligible to take additional deductions by opening additional accounts. You may not qualify if you have a high AGI, but it’s always good to know what your options are, especially if your income is likely to decrease in the future.

Review Your Flex Spending Account (FSA)

Another great year-end tax moves to make is to make sure you don’t lose any money in your flex spending account. Check with your employer if your plan is eligible for a rollover of unused funds until March 15 of the following year. On the other hand, if you’ve already run out of funds in your flex spending account but have things like medical work or fillings to do at the dentist, try to postpone them until next year if they aren’t urgent. That way you can save on taxes by allocating enough funds in next year’s FSA to cover those expenses. If you’re planning on leaving Corporate America next year, get your physical done this year (usually free under preventative care). Also, consider going to specialists to treat specific injuries. Maybe you need an MRI for a bum knee. Maybe you should finally see a pulmonologist for your asthma or COPD. Try and get your money’s worth when it comes to healthcare. Don’t neglect physical ailments that are bothering you, for they might get worse and more difficult to fix in the future. 

Business Tax Moves

A business that is cash-based, not accrual-based, can defer taxable income to the following year by sending December invoices at the very end of the month. The reason this can work is the business won’t receive payment for those invoices until January or later, and the business’ taxable income isn’t captured until the date the cash comes in. Companies and sole proprietors can also reduce taxable income in the current year by charging business-related expenses in 4Q that they’d normally take in Q1 of the following year. If you expect your business to grow rapidly in the following year, then wait until the following year to load up on capital expenditure. If you’re having a great business year, simply wait until the new year to cash your November and December checks in January. Although, there’s always a risk the vendor might disappear or go bust before you can cash your check. Make sure you know what the time limit is for cashing in a check as well.

Charitable Donations

Being able to give your time and money away to worthy causes is one of the best benefits of being financially independent. No longer will you always feel conflicted about whether you should save and invest your next dollar versus helping someone in need. You just tend to give more because you can. Just keep in mind there are guidelines you have to meet in order to claim deductions on charitable donations. Here are several things to keep in mind: You’ll need to itemize deductions and file Form 1040. The charity organization must be qualified with the IRS and be actively tax exempt. This excludes political candidates and organizations, as well as individuals. Used items such as housewares and clothing must be in good condition or better for them to be deductible.

Donated vehicles can be deducted at fair market value if you meet certain requirements. For example, the charity must sell your car well below market price to a person in need, or the organization must make major repairs to increase the car’s value. Alternatively, you could qualify if the charity will use the car for purposes such as delivering meals to needy individuals. If the total of your non-cash contributions is greater than $500, you’ll need to file Form 8283. You’ll need a written record of all cash donations with the date, amount, and charity name. So keep your cell phone bills for text donations and any relevant bank statements. Following special tax law changes made earlier this year, cash donations of up to $300 made before December 31, 2020, are now deductible when people file their taxes in 2021. This is relevant for those who file using the standard deduction as this is an addition. For those who itemize, it’s the same as always. And if you receive goods or services for a donation, you can’t deduct your entire contribution. The value of what you received must be less than your donation, and you can only deduct the difference. If you are volunteering and performing services for a charity using your car, you can deduct mileage. Travel expenses can be deducted if you go on a trip with a qualified charitable organization and you’re “on duty in a genuine and substantial sense throughout the trip” per the IRS. Donations of property are generally deducted at fair market value based on what they would sell for on the open market. You can avoid capital gains on appreciated stocks held over a year if you donate them to a charitable organization. The amount you can deduct is determined by the stock’s fair market value on the contribution date.

Capitalize Losses On Bad Investments

If you own securities or property that have been declining and you’re below your cost basis, consider liquidating before year-end if you don’t anticipate a recovery. Losses on property held for personal use can’t be deducted. Only investment property losses can be written off. And you’ll also need to look at the net of your capital losses and gains because if your gains are higher than your losses, you’ll owe money on the difference. Under the tax code, an individual may deduct up to $25,000 of real estate losses per year as long as your adjusted gross income is $100,000 or less and if you “actively participate” in managing the property. The deduction phases out as an individual’s income approach $150,000. Individuals whose adjusted gross income exceeds $150,000 are not eligible for this deduction. This income threshold hasn’t changed for a while. Note that you cannot deduct rental losses to your active income (e.g. day job income). Rental losses can only be deducted from passive income. You report your rental income and deductible expenses on IRS Schedule E. The IRS reports that roughly half of the filed Schedule E forms show losses. Unfortunately for stock investment losses, you’re still only allowed to deduct $3,000 a year in capital loss deductions from income. I’ve had losses of $50,000 or more before that will take over a decade to deduct! At least you can carry over unused losses into the next year and so on. You can also offset capital losses if you have capital gains. $3,000 isn’t a huge tax break for the year if you qualify, but every bit helps when you’re on a mission to pay fewer taxes.

Deferring Income And Itemized Deductions

It’s good practice to anticipate and prepare for changes to your income in the upcoming year. If your income is likely to go down next year, you’ll want to take as many deductions in the current year as possible and vice versa. If you are having a fantastic income year, then it’s best to defer some of your income to the following year. You should also increase your necessary expenses during a great income year. If you are having a bad income year, then defer such expenses until income improves. This is one of the best year-end tax moves to make for business owners. You can also try asking your employer if they can pay your year-end bonus in the following year if you want to defer income. Back when I was working in finance we had the option to defer our entire year-end bonus until some later date by 1 – 3 years.

Contribute To Tax Advantageous Retirement Accounts

You can make additional contributions to your 401k before year-end if you haven’t already maxed it out. The 2020 and 2021 401(k) maximum contribution amount is $19,500. If you are a sole proprietor, don’t forget to contribute the maximum to your solo-401(k). In addition, you can make current year IRA and Roth IRA contributions until April 15 the following year. Or, you can wait to see what your modified AGI will be and then contribute accordingly. For those of you who have experienced a particularly difficult year due to a job loss or other reasons, it may be beneficial for you to convert your traditional IRA into a Roth IRA. A conversion is a taxable event. However, the idea is to convert your traditional IRA when your marginal federal income tax rate is at its lowest point. Once taxes are paid on a Roth IRA, it grows tax-free and can be withdrawn tax-free. In general, I’m not a fan of paying taxes upfront with a Roth IRA, especially if you are in the 24% marginal income tax bracket or higher. If you are struggling financially, it may be even more difficult to bite the bullet and convert, despite being in a lower tax rate.

Consider Revising Your Withholding

Even though you probably submitted your W-4 form to your employer ages ago, you can still file a revised form to make adjustments to the remaining pay periods left in the year. If you anticipate you haven’t withheld enough taxes so far this year, you can increase your withholding to help reduce penalties and fees when you file your taxes. Check if you’ve already paid 100% of your current tax liability this year. If so and your AGI is less than ~$150,000, you should be able to avoid being charged a penalty. But you’ll need to have paid 110% of your current tax liability in the year to avoid getting dinged if your AGI is above ~$150,000. This safe harbor method is generally the easier option to avoid paying a penalty because the alternative is to have withheld 90% of your tax liability, which can be difficult for freelancers and independent contracts to calculate. If you are earning both W-2 wages and 1099 income, bumping up your January 15th estimated tax payment to compensate for having underpaid in previous quarters doesn’t work. Each quarter is treated separately with estimated taxes. However, withheld taxes on paychecks are treated as if they were paid throughout the whole year.

Know All The New Tax Rules

We all need to spend several hours each year reviewing and understanding the latest tax rules. Given the tax code is tens of thousands of pages long, spending several hours a year is the least we can do. There are many new propositions and tax laws that passed in 2020 that may affect your future tax liabilities. To know the right year-end tax moves to make each year, you need to review all the most pertinent rule changes every year.

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