Tax planning is important stuff. Perhaps not as exciting as the markets but saving money on taxes can still be exciting! Mid-November begins the countdown to year-end. The following is a handy Tax Planning Checklist.* Some of these items, if done now, could make a big difference to the 2021 tax year AND add to savings.
1. How close are you to maxing out your 401k? The max is $19,500 for those under age 50 and an extra $6,500 for those age 50 and above. The deadline is December 31st and lots of 401k and 403b plans allow contributions of as much as 25-30% or even 100% of pay. Contribution rates can be lowered again in the new year.
- Pre-tax 401k contributions are tax-deductible; try a combination of pre-tax and post-tax Roth 401k contributions for savings on taxes today and in the future.
2. For those who have already maxed out 401k for this year (great job!) think about contributing the same dollar amount per paycheck to another savings vehicle through the end of the year: vacation fund, emergency fund or kids’ college funds.
3. Don’t have a 401k? Contributions can be made to a tax-deductible IRA subject to certain income limits. April 15th of next year is the deadline to make IRA contributions for tax year 2021. Max amounts are $6,000 and $7,000.
4. For non-working spouses without access to a 401k, contributions can be made to a separate IRA until April 15th of next year; these are called “spousal contributions” to an IRA and can be tax-deductible under certain income limits. The $6,000 and $7,000 max amounts apply.
5. Are you Self-Employed? How many employees do you have (if any)? You may be able to contribute to a SEP-IRA. SEP contributions are tax-deductible to you or your business and can be done as late as September of NEXT year or when the business tax return is filed.
6. “Tax loss selling.” Check with your financial adviser if there are investments in non-IRA accounts that have losses. These capital losses can be “realized” (meaning the investment is sold for a loss) and the losses used to offset the capital gains and can also be carried forward indefinitely. Sales need to be done by December 31st. (Check with your tax adviser!)
7. If you have an Inherited IRA then most likely there is an “RMD” (Required Minimum Distribution) to be removed from the IRA by December 31st of this year. Ask me about this one.
8. If you have turned age 72, RMDs must be taken from your IRA, 401k, or pension (or another annuity) by December 31st.
For all of these items – and more – there is still time remaining in 2021 to accomplish tax-deductions and/or create new savings vehicles!
Please ask me for additional ideas and strategies, especially for those who are self-employed or if your income is much higher (or lower) than last year. Always consult with a tax professional on all tax matters.
* Always consult with a CPA for tax advice and planning.