Here are eight essential tax-saving tips that must be implemented before year-end. If you want to maximize your tax benefit in 2021, you must act soon.
8 Tax-Saving Tips That Must Be Applied Before Year-end
It’s important to understand that these tax-saving tips will only save you money if they are right for you. There are some tips, for example, that benefit those who’ve had a good year, while others create silver linings in an otherwise bad year.
Be sure to consider whether each tip is right for you, and always consult a financial planner to make sure you’re using them correctly and without penalty.
Tax Saving Tips: For Everyone
- Convert to a Roth IRA.
A Roth IRA can save you tens of thousands of dollars over your lifetime because, unlike a traditional IRA, all future withdrawals are tax-free – plus, there’s no RMD. However, to qualify for a Roth IRA, you must earn below the income limit and pay taxes on your contribution in the current year.
If you don’t qualify for a Roth IRA in a typical year, but you’re in a lower income bracket this year, then consider a Roth IRA conversion. This strategy allows you to withdraw that money without paying taxes in the future, and it beefs up your tax position in 2021.
- Harvest investment gains.
If your income is lower than usual, you also might consider harvesting gains on your investments to increase your liquidity. Under the guidance of your financial planner, you can go into your portfolio and take profit on purpose. You can likely sell certain things at no tax expense or very little tax expense, as well.
This is another creative strategy if you want to make a large purchase, investment, or installment in your emergency savings and need to increase your liquidity. Coming off a few strong investment years, this may especially make sense for 2021.
- Anticipate the future.
Finally, the most important tax-saving tip is to plan for what lies ahead.
The point of financial planning, and specifically tax planning, is to create a roadmap for your future financial decisions so you’re prepared for any outcome – positive or negative. But without a plan, you won’t understand how to pivot efficiently and successfully. So, by making thoughtful decisions today and a plan that anticipates your moves tomorrow, you can set yourself up for success.
Tax Saving Tips: For Business Owners
- Re-evaluate your payroll structure.
It’s crucial for business owners to re-evaluate their payroll structure in 2021. Small business owners, especially, can make some critical decisions now, based on their payroll plan.
Many business owners don’t realize that how they decide to pay themselves impacts their payroll tax. The amount you pay yourself and your family, as well as the pay structure you use, directly affects your payroll taxes, and a few simple changes add up to significant savings.
- Take a QBI deduction.
The qualified business income (QBI) deduction was introduced as part of the Tax Cuts and Jobs Act of 2017 but still isn’t being utilized as widely as it could be. Sole proprietorships, partnerships, limited liability companies (LLC), or S corporations could qualify for a tax deduction worth up to 20 percent of their net income. There are some restrictions, but this easy deduction is not one to be missed. It’s another example of why your payroll decisions shouldn’t be put on autopilot.
- Consider a Roth IRA for your retirement plan.
Payroll decisions are directly linked to your ability to fund your company retirement plan, if you have one, so be sure to review your payroll before making decisions about your retirement. If you’re having a good year, then you might want to fund your 401k, which is a deductible tax write-off. On the other hand, if you’ve experienced a drop in income, then consider funding a Roth IRA because its future growth isn’t taxed, and you don’t need the additional tax deduction this year.
Tax Saving Tips: For Givers
- Donate appreciated securities instead of cash.
If you’re in a higher tax bracket this year, charitable giving is a great way to pay some of that success forward while benefiting from a few tax strategies. For example, you might consider donating appreciated securities – such as stocks, bonds, or security funds – because they are a more effective way to give than cash. This strategy is particularly effective if you want to reduce your tax liability this year and future years by donating appreciated assets, avoiding capital gains tax on these securities if sold.
- Set up a donor-advised fund.
A donor-advised fund allows you to donate a large amount, and take the tax write-off, today but disperse the donations to the charity over time. Generally, people make their charitable donations in December to get the benefit of the tax write-off in the current year. If your income is down, however, simply delay the donation until January 2022. That way, you save the tax write-off for next year when you need it more, and you can even benefit from double the charitable giving deduction in 2022. The charity won’t mind because they don’t pay taxes on your donation.
Tax Saving Tips: The Bottom Line
As you prepare to make the most of your year-end financial moves, remember to talk with your financial advisor or certified tax planner to get the most significant benefit before it is too late.
To schedule a complimentary consultation with one of our Wealth Advisors — and get a second pair of eyes on your tax plan — book a complimentary consultation.
Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute advice. Vance Wealth does not provide tax or legal advice. You should contact your tax advisor and/or attorney before making any decisions with tax or legal implications.