6 Year-End Tax Planning Tips
2021 was an eventful year. Many of us experienced new and familiar challenges — from transitioning back to the office, keeping up with economical changes, moving or remodeling our homes, and more. But as the end of the year approaches, there’s one thing that remains consistent: it’s time to organize your finances for next year.
The holidays are a busy time for everyone but making a plan now will minimize tax burdens later. To help you get started, here are six quick tips to consider as part of your year-end planning.
- Set Savings Goals
First things, first. A new year will always bring new financial priorities. If you had a savings goal for 2021, evaluate how you did and set realistic goals for this year.
As a first step, start reviewing at your taxable income and look to take advantage of all deductions, exclusions, or exemptions that you may be eligible for. Not sure where to begin? If you have any questions on how to get started, a professional can help put you on the right track.
- Max Out on Your Retirement Account Contributions
Retirement accounts — like 401(k) or traditional IRA — compound over time and are funded with pre-tax dollars, making them a great investment in your future. This account is tax-free so any contribution can help lower your taxable income once tax time rolls around.
Most employers offer a matching program to double your savings, so consider increasing your contributions for an even greater tax advantage. In 2022, you’ll be able to max out at $20,500 alone, plus an additional $6,500 if you’re over the age of 50. The limit on total employer-plus-employee contributions will be $61,000.
- Adjust your Withholdings
Generally, your employer will withhold income tax from your paycheck and pay it to the IRS on your behalf. If you claim too many allowances, you’ll owe money during the tax season. Talk to your employer about increasing your withholdings until the end of the year to cover the shortfall. If you need to adjust, file a new W-4 at your workplace to lower your allowances.
The biggest advantage of this is that withholding is paid evenly throughout the year versus when the money is taken from your paycheck. This strategy can also help make up for low or missing quarterly payments. Remember, unemployment benefits are subject to federal income tax.
- Carefully Consider Charitable Donations
Donating to charity is a good strategy to reduce taxable income while supporting a meaningful cause. Today, crowdfunding campaigns like GoFundMe are more popular than ever, but there is a catch — not all donations here are tax deductible.
GoFundMe hosts two types of donations: Personal campaigns and Certified Charity campaigns. If you are donating to a Personal campaign, the IRS categorizes this a personal gift, which is usually not tax deductible. If you donate to a GoFundMe Certified Charity campaign, this contribution can be written off because they are a qualifying organization as defined by section 501(c)(3) of the Internal Revenue Code. You can learn more about which organizations qualify for tax deductions here.
- Review Your Estate Documents
You should review and update your estate plan on an on-going basis to ensure it accounts for all life changes and stays aligned with your goals. Here’s what you should focus on:
- Trust funding
- Beneficiary designations
- Trustee and agent appointments
- Provisions of powers of attorneys and health care directives
- Rebalance your Portfolio
Analyzing your capital gains and losses may reveal tax planning opportunities. For example, selling investments at a loss could reduce your taxable income. Reversely, selling investments that have appreciated may allow you to realize those gains. Consider having this discussion with a financial planner or tax attorney to come up with the best strategy for you.
The key to any successful financial plan is to be proactive and start early. These are just a few tips to help you get started, but if you have specific questions or concerns, contact Brilliant Accounting to discuss your goals and find out how we can help you.
