This year was both a blessing and a curse for those returning to work. While many of us could return to normalcy after many months of COVID-19 related uncertainty, we are still navigating tricky economic times. Therefore, there has never been a more critical time to save as much as you can on your taxes this year to recover from the past couple of years and move forward into a more prosperous time.
While it’s important never to cut corners and risk an audit, there are plenty of ways to reduce your tax rate that the IRS encourages legally. Deductions and tax laws are made to enable citizens to save, so take advantage of every opportunity you can, starting with these strategies.
Prepare for Changing Tax Laws
There has been discussion around tax law changes. It’s important to stay on top of the tax landscape and see what proposals are being mentioned. It’s hard to read the wind on what’s actually going to become law.
Remember, until proposed changes become law, there is no need to rush to make changes to your finances or investments. Stay informed about these changes, and talk to your advisor first if you believe you will be impacted.
In 2021, the CARES Act increased the limit on tax-deductible charitable contributions via cash from 60% to 100% of adjusted gross income. Any contributions over 100% will be carried into the next tax year, which means now is the perfect time to give to your favorite charities or foundations
With the stock market performing well over the past couple years, many individuals have brokerage accounts with highly appreciated assets (stocks/mutual funds/ETF’s). Consider donating these assets directly to a charity or into a Donor Advised Fund. This will allow you to write off the full amount and absolve any long-term capital gains.
This provides you with a great way to save on tax credits while also helping charities struggling due to the COVID-19 pandemic.
Talk to your advisor about how to donate to a charity in the most tax beneficial way.
Child Tax Credits
In 2020, families across the country received a tax credit of $2,000 for children under seventeen, and this year it increased to $3,600 for children under six and $3,000 for children under eighteen.
However, your total adjusted gross income (AGI) must not exceed $150,000. The money you make beyond this limit will incrementally reduce your child tax credit. You can reduce your AGI through your pre-tax savings vehicles by funding any available IRA, HSA, or 401k contributions. This can help you keep your AGI under the tax credit limit.
The landscape on tax legislation is always changing. It’s important to take advantage of the opportunities you have during the current year to maximize opportunities in the future. Below are some of the most common ways people in 2021 are making smart retirement decisions on their tax returns.
- Convert to a ROTH IRA if you’re in a lower tax bracket – If you are in a lower tax bracket than you were in 2020, you may want to consider converting from a traditional to a ROTH IRA. This allows you to take advantage of your lower tax bracket now and enjoy tax-free income when you retire. Current tax law is set to sunset in 2025 and tax rates will likely increase as a result. Now is a great time to start planning systematic conversions.
- Check to see if your 401K has access to after-tax contributions that can be converted into Roth dollars. If you’re a high-income earner you could maximize your contributions above the standard $19,500 annual contribution by funding after-tax dollars up to $58,000 (2021) and immediately converting them into your Roth 401K bucket. This could give you access to more retirement funding while utilizing tax-free growth.
Unemployment benefits also affected many individuals this year due to COVID-19 closures and increased work-from-home or contact-free services. If this is the first time you’ve been unemployed for a while, you may need to determine how this affects your tax return, as well as the differences in unemployment benefits in 2021.
In addition to state unemployment benefits, the CARES Act enabled unemployed individuals to receive an additional $600 per week in 2020 and $300 per week in 2021. However, unlike the stimulus payments, these amounts are taxable and must be included in your gross income. Therefore, if you received these payments for several months in 2021, you need to consult with your tax advisor to get a clear picture of your actual income and how much you owe.
Health Savings Accounts
COVID-19 has also made many people rethink their health insurance and health savings plans. If you have a high-deductible health insurance plan, you may be able to receive special tax deductions in 2021. In addition, with a health savings account (HSA), you can make 100% tax-deductible contributions to your future retirement healthcare plan.
HSA contribution limits increased in 2020 to $3,600 per individual or $7,200 for a family. Catch-up contributions are allowed for those 55 and older and can increase your tax-deductible amount by $1,000. How much you contribute will not only affect your taxes this year but will keep you secure for the future.
The funds in an HSA can be invested and grow just like your retirement savings; however, major bonus is that withdrawals for qualified medical expenses are tax free too. So if you are expecting higher medical bills in the future, talk to a tax advisor now about your different options.
Talk to An Advisor Today!
Your best option for moving forward is to stay vigilant and make the most of your tax options. The better you prepare now, the more secure you’ll be for retirement. If the COVID-19 pandemic has taught us anything, financial security is of the utmost importance no matter how old you are or how much you earn each year.
OneAscent can also help you prepare for the future with investment and retirement options that keep your and your family’s future in mind. To learn more about our investment strategy and opportunities for individuals and families, contact us.