Updated: Apr 6
Now is the time to plan for your 2021 taxes; so, you should consider:
1. The standard deductions
This year, they increased the standard deductions to $12,550 (up $150 from 2020) for single filers and $25,100 (up $300 from 2020) for married filing jointly.
Itemized deductions are only useful if they exceed these amounts.
Folks age 65 or up will get $ 1,350.00 more per person ($1,700.00 if unmarried)
2. Your health savings account
If you are enrolled in a high-deductible health plan, you should qualify for a health savings account. These contributions are pre-tax, reducing your taxable income, and annual contribution amounts are higher for the 2021 tax year.
The contribution deadline is April 15, 2022.
$3,600 individual coverage (up $50 from 2020)
$7,200 family coverage (up $100 from 2020)
Those over 55 can make an additional $1,000 catch-up contribution.
3. Making cash contributions to your favorite charity(ies)
If you take the standard deduction (instead of itemizing), a cash gift to a qualified public charity (cash, check, or credit card) can reduce your taxable income in 2021.
Married couples filing jointly, can deduct up to $600 (this is double the amount allowed in 2020)
Single filers can deduct up to $300 (no change from 2020)
Note: Contributions to donor-advised funds and most private foundations, as well as non-cash contributions, are not eligible.
Fallen property– Do not give away or donate any assets that have fallen in value since you bought it. Sell the assets first, use the loss on your 1040 and give away or donate the proceeds.
Appreciated Property- You are far better off by gifting appreciated property or donating it to charity. Any future appreciation will be out of your estate, and if you are donating, you can deduct its total value in most cases.
Suppose you have owned the asset for over a year. Combining more than one type of asset can be a tax-efficient move to maximize the amount you can take as a charitable tax deduction.
4. A qualified charitable distribution
If you are over 70.5 years old and would like to support a charity, consider a QCD (Qualified Charitable Distribution) which can be up to $100,000 directly from an IRA to a qualified charity. A QCD helps reduce your AGI (Adjusted Gross Income) and, thus, your taxable income for the 2021 tax year. This is good whether you take the standard deduction or itemize deductions and should count toward your required minimum distribution (if you have one) as well.
5. Contributing to an IRA
Contribute to your traditional or Roth IRA, which can be done in a lump sum, if you prefer, by April 15, 2022, deadline. The maximum total annual contribution across all IRAs for 2021 is $6,000, or $7,000 if you are 50 or older.
Traditional IRA: Contributions are usually tax-deductible; this depends upon your income level and whether you have a retirement plan at work
Roth IRA: Your income level dictates whether you are eligible to contribute to a Roth; these IRAs are funded with after-tax dollars; but, most often, Roth IRA distributions are tax-free in retirement
Pay less taxes by contributing to your 401(K). The Maximum contribution for 2021 is $19,500.00. Age 50 and over can put in as much as $26,000.00 SEP Contribution- Self Employed Individuals can set up SEP plans to reduce their taxable income up to $58,000. The plan must be set up by April 15, 2022, or October 15, 2022, with an extension.
Simple IRA- Elective deferral limit $13,500 with $3,000 catch up contribution for 50.
6. Deduct your medical expenses
If you itemize your tax deductions, you can deduct eligible unreimbursed medical expenses which exceed 7.5% of your AGI.
There are many deductible medical expenses listed on the IRS website.
7. Consider tax-loss harvesting
Stock valuations have been high throughout 2021; so, if you have a losing stock in your portfolio, using tax-loss harvesting should lower your tax bill while allowing you to maintain a diversified portfolio. Your financial advisor might recommend selling this losing stock and immediately re-investing in an asset that offers a similar risk/return profile as the one you sold; so, carefully weigh the risks and benefits before acting.
Note: Buying the same security immediately after taking the loss can result in losing part, or all, of the loss because of the wash sale rule.
8. SALT Tax Deduction (State and Local Tax A.K.A. property tax)
You can deduct any combination of residential property taxes and state income taxes up to a $10,000.00 cap. Property taxes remain fully deductible for a rental property or business for-profit activity. If your total annual SALT tax is less than $10,000.00, mailing your 4th quarter 2021 estimated state income tax in late December 2021 allows you to claim the deduction this year.
9. Mortgage Interest
Interest can be deducted on up to $750,000.00 of new acquisition debt on a primary or second residence. The new limit applies to mortgage debt incurred after December 14, 2017. Older loans and refinancing up to the old loan amount get the $1,000.0000.00 cap. Making the January 2022 mortgage payment on your residence before the end of this year enables you to deduct the interest portion in 2021. No write-off is allowed after 2017 for interest that you pay on existing or new home equity loans from which the proceeds are used to buy a car, pay down credit card debt, etc.
10. Gift and Estate Tax Exemption
The lifetime exemption for estate and gift tax is $11.7 Million per individual. You can gift or bequeath up to 11.7 million tax-free to the next generation or anyone else who's up to 37.5 years younger than you.
Annual Gift tax Exclusion- Throughout your life, you can use the annual gift tax exclusion to give up to $15000.00 per person to as many people as you like without eating into your lifetime federal gift, estate, and generation-skipping transfer tax exemption. California is one of the 38 states that does not have an estate tax.
11. Long Term Capital Gain Tax Rates
The capital gains tax is either 0%, 15% or, 20%. The 20% rate applies for the taxpayer with taxable income over $445,850.00 on single filed returns and $501,600.00 on joint returns. The 0% rate will apply for the taxpayer with taxable income under $40,400.00 on single filed returns and $80,800.00 on joint returns. The 15% rate applies for filers with incomes between those breakpoints. The 3.8% surtax on net investment income remains, kicking in for single with modified AGI over $200,000.00 individual. $250,000.00 for married. On the Loss side, it may pay to dump losers. Capital losses you incur offset your gains and up to $3,000 of other income; any excess will carry over to 2022. Be careful about the wash-sale rule, which could prohibit you from claiming a loss.
12. Lastly, the six ways to minimize capital gains taxes
1. Hold the investment longer
2. Exclude home sales
3. Rebalance with dividends
4. Use tax-advantaged accounts
5. Carry losses over
6. Consider a Robo-advisor
Putting assets into service by December 31 can provide large write-offs. 100% bonus depreciation is back, at least temporarily. Under the new tax law, the business can write off the entire cost of qualifying assets they buy and place in the service after September 27, 2017. This break generally lasts through 2022 and then phases out 20% for each year thereafter before expiring in 2027. The break applies to new and used asset purchases with 20 years or less. The cost of qualified film, television, or live theatrical productions is eligible too. Section 179 increased to $1,050,000.00. The phase-out threshold is $2,620,000.
Just remember, no matter how many deductions apply, we all have to pay our due.