IT'S NOT LATE TO CHANGE EVERYTHING: HOW YOU CAN AFFECT TAXES FOR THE ENTIRE 2021 IN DECEMBER
The last month of the year means a lot of things - holidays, parties, games and more. But it is also an opportunity to conduct tax planning.
By now, do you have a good idea of how you will end 2021 in terms of income generated and deductions available? Here are some general year-end tax tips that apply to federal returns.
Analyze your expenses
One of the key decisions at the end of the year is to review your expenses to see if you can detail them. Otherwise, you will need to choose the standard deduction, which has become much more common since the tax reform in 2017. About 90% of taxpayers choose this method. General itemized deductions include property taxes, mortgage interest, state income tax, charitable donations, and medical expenses.
For 2021, the standard deduction is $12,550 for individual taxpayers and $25,100 for married couples filing jointly. If your refundable expenses are above these thresholds, you'll probably want to detail them.
Determine your tax bracket
Another aspect that can help when planning for the end of the year is determining your income level. Think of categories like buckets of water. As your income grows, you fill in the first category with the lowest tax rate, and then move on to the categories with consistently higher tax rates.
The lowest rate is 10% for individual taxpayers making $9,950 or less, or $19,900 or less for married couples filing jointly. Rates reach 37% for individual taxpayers with incomes above $523,600 and for married couples above $628,300. The intermediate rates are 12%, 22%, 24%, 32% and 35%.
A bid analysis can help determine whether you want to delay or speed up your income. For example, if accepting a higher-paying job in December could take you out of the 12% group and into the 22% group, it might be worth waiting until January.
Given that tax rates are likely to rise in the future, it would be wise to use the lower bound as much as possible.
Consider optional expenses
Many people don't have much wiggle room at the end of the year when it comes to income. Chances are you won't start a new job in December, for example, although you may be able to defer bonus or other income until January.
There are often more opportunities to increase deductible expenses. You probably won't be able to significantly change your mortgage interest, but there are other options, such as charitable donations.
The basic rule is that you can deduct donations to qualified charities. The amounts you donate, plus other deductible expenses, may be enough to earn a large deduction thanks to the itemization.
Special donation rules may apply
A special note to almost all taxpayers is that cash donations of up to $300 per person ($600 for married couples) are eligible for a special deduction, without the need for an itemization.
For seniors who don't need to live on all their retirement money, a qualified charity giveaway or QCD may come in handy. If you are at least 70.5 years old, you can take advantage of this provision, which allows you to directly transfer up to $100,000 from an IRA to one or more several charities.
You won't get the deduction that normally applies, but the money is not recognized as taxable income, which can help you meet the minimum category and avoid taxes on some Social Security payments and possibly higher Medicare fees.
You may also want to open a fund, especially if your income has skyrocketed and you need to withdraw at the end of the year. These funds allow you to donate cash or other assets such as securities, claim a deduction now, and then spend some time deciding which charities to send the money to.
Medical deductions
The tax reform was supposed to raise the lower limit on medical deductions from 7.5% to 10%, which meant that people could only write off health care costs that exceeded 10% of their income. But Congress temporarily lowered the threshold to 7.5% and then made it permanent at that level, making it easier to deduct medical expenses.
Many medical expenses are deductible, including doctors' expenses, hospital expenses, prescription drugs, some transportation expenses, some insurance premiums, and more.
It's also worth thinking about "bunching" - skipping certain deductible expenses for one year (and getting a standard deduction) and then doubling the next to get into the deductible range.
Capital gain
Many investors sit on taxable stock market accounts or income from other assets. It is often wise to delay the sale in order to delay paying taxes on profits. But if your taxable income is modest, you can make a profit and pay it back this year. Especially if you qualify for a long-term capital gain rate of 15% or even 0%.
Long-term rates apply to assets held for more than one year; otherwise, profits are taxed as ordinary income at rates that are usually higher. A 0% rate may apply if your annual taxable income is less than $80,800 for married couples or $40,400 for individual taxpayers.
Conversely, it would be wise to be aware of the losses. As a general rule, if your losses exceed your earnings for the year, you can deduct up to $3,000 from regular income. This "loss collection" is best done at the end of the year, when you have a better idea of your tax situation.