The year has less than three months. You may not think there is much you can do to influence your tax situation, but the truth is that you still have a lot of time until the end of the year to save taxes.
And I’m not talking about losing a lot of money, Donald Trump style, to offset your profits. I’m talking about some practical steps you can take today to lower your tax bill for the year.
So here are ten different ways you can save on taxes before the end of the year without losing a lot of money.
1. Increase your 401k contribution
One of the best ways to save on your tax bill today is to contribute to your 401k or 403b. These accounts allow you to save pre-tax money for retirement. The result? You pay less tax today because the money grows tax-free until you withdraw it in retirement.
For 2021, the contribution limit of $ 401,000 is $ 19,500, but if you are over 50 you can make an additional $ 6,500 make-up contribution.
If you are not yet at the limit, adding it to your 401k is a great way to save money AND save taxes.
And remember that 401k contribution limits change every year, so check out these here: 401k contribution limits.
2. Maximize your traditional IRA
Similar to a 401k, you can contribute to a traditional IRA and lower your taxable income. Deciding whether to contribute to a Roth or Traditional IRA can be difficult, but if you only think about this year’s taxes then using a traditional IRA is the way to go.
For 2021, you can contribute $ 6,000 to an IRA if you are under 50 and $ 7,000 if you are over 50.
And remember, while there are no income limits to contributing to a traditional IRA, there are income limits that could prevent you from deducting your contribution.
Find out more about the IRA contribution and the limits here.
3. Maximize your SEP IRA or Solo 401k
If you are a rival, it is important that you take advantage of a SEP IRA or Solo 401k to lower your taxable income. Sideline activities are great (and here’s a list of 50 to try), but it’s important to remember that the bulk of that income is not Withholding taxes so you have a big tax bill on your side to generate some cash.
By contributing to a SEP IRA or Solo 401k, you can move some of that money into the future and avoid paying tax on it today. This is a great way not only to save, but to lower your tax bill this year.
Contributing to a SEP IRA is easy, and you can do so by April 15th. Setting up a Solo 401k is a little trickier and you need to have your plan in place by the end of the year to be able to contribute. But you can also save a lot of money.
In 2021, a SEP IRA could save you 25% of your income, up to $ 58,000 per year. You can also save up to $ 58,000 a year with a Solo 401k!
4. Maximize your HSA
We’re big fans of using your health savings account to save for retirement. If this year you have the opportunity to maximize your HSA, make sure you are contributing as much as you can. And remember, if you can afford it, you won’t get any refunds this year. Save your receipts and let the money in your HSA grow for you.
As a reminder, the HSA is like your IRA, and you can actually make your contributions for 2021 by April 15, 2022.
In 2021, you can contribute up to $ 3,6000 if you are single and $ 7,200 if you are a family. If you are over 55 years of age, you will also receive a $ 1,000 catch-up fee. Read the full HSA contribution limits here.
5. Save for your children’s college
Contributing to your child’s 529 plan is a great way to save for college, but it’s also a potential tax break for you. If you live in one of the 32 states that offer 529 deferred plan contributions, this can be a great way to lower your state income tax bill.
While the federal government doesn’t offer deductions for contributions to a 529, many states do.
Contributions to a 529 plan are considered gifts, so contribution limits are based on the gift tax exemption.
You can donate up to $ 15,000 per child, year, per person. So married couples could contribute $ 30,000 per child per year. There is also a 5 year contribution rule where you can give a full $ 75,000 per child in one lump sum, and that counts as contribution for the next five years.
Learn more about the contribution limits of the 529 plan here.
6. Make energy efficient improvements to your home
By upgrading your home to be energy efficient, you can qualify for tax credits that can save you taxes this year.
In 2021 you can get a 26% tax reduction on installing solar panels in your home (and it will decrease to 22% in 2023). You can also get a 10% tax credit if, for example, you upgrade your air conditioning or heating, add insulation, or replace windows and doors to be more energy efficient.
All of these loans can help you balance your income and make great savings.
A full list of energy efficiency tax credits can be found here.
7. Maximize your work-related expense allowances
The fact is, most people are terrible at keeping track of their expenses. I’m not saying you should be spending more so that you can deduct your expenses – I’m just saying that you need to keep track and deduct what’s right.
Some work-related deductions you might get:
- Transportation and Travel – Mileage is one that many people miss or forget to calculate
- Meals and entertainment
- Union and professional dues
- Uniforms if your employer does not compensate you and they cannot be worn outside of work
- Job-related educational expenses, especially if professional training is required
The same rules apply when you are working for yourself. For example, if you drive for Uber or Lyft, you should keep a close eye on your mileage and driving-related expenses. All of these balance your income and help lower your tax burden.
The easiest way to keep track of things is with a free app called Everlance. When you drive for your job (uBer, Lyft, real estate agent, photographer) this app runs in the background and automatically records your mileage. It is wonderful. The app is free and has many features that you don’t have to pay for.
There is a premium version, however, and we’ll hook you up to get it. Just use the code “TCI20“to get Everlance credits of $ 20. You can then either apply these credits to a monthly account and get Premium for free for a few months, or you can apply this to the $ 60 annual plan.
In order for the system to recognize you, new users must visit our website. IIf you pay with the app instead of the website, you will not be able to use the discount code and they will not be able to refund you.
So keep an eye on your expenses and save money.
8. Donate to charity
Another great way to save is to simply donate to a charity. Your donations in cash and in kind can be deducted from your taxes.
So start autumn cleaning right away, get organized and see what you no longer need. Some rules of thumb are:
- Clothes that you haven’t worn in a year
- Old children’s clothes or toys that they no longer use
- Items that have been left unused in your garage for a year
Take these items to a local charity, keep your receipt, and deduct your donation from your tax return.
In 2021, even if you don’t list your tax return, you can deduct up to $ 600 in charitable cash donations. And for those who do, cashless donations up to 100% of your AGI can be deducted this year.
9. Sell your loser stocks …
Well, I know I mentioned above not to be a loser like Donald Trump and make huge losses just to avoid taxes. But … even good investors have poorly performing stocks. Now is a good time to look at your portfolio and sell some losers to take on the loss of capital.
This strategy is known as tax loss harvesting.
This can be an effective strategy, especially if you have a lot of capital gains in your portfolio early in the year.
If you do this, make sure you follow the capital gains tax brackets.
But on the other side…
10. Wait for your portfolio to rebalance
That sounds strange, but wait until the new year to realign your portfolio. You see, many mutual funds and ETFs pay dividends and capital gains in December. If you sell your losers at the end of the year, just wait until January before wagering that money.
When you buy into a mutual fund or ETF just before the payout, you are effectively buying yourself a tax burden. Since the distributions are part of the net asset value (NAV) anyway, you won’t be missing out on much if you just wait a couple of weeks.
Here is our guide to realigning your portfolio across multiple accounts.
Things to Consider for the Next Year
There are some things that you just cannot change this year (maybe you have already sold some stocks or made other profits) but at the moment enrollment is usually open to many people. And that means you can make changes for next year.
If you want to reduce your taxable income, here are some changes you should make during open enrollment:
- Maximize your 401k contribution
- Choose a high deductible health insurance plan with an HSA
- Maximize your HSA
- If you have children, use an account for dependent expenses for childcare costs
- If you are commuting to work, consider having a transportation expense account if justified
What else? What are you doing to lower your taxable income each year?