Consider these year-end tips to lower your tax bill or boost your refund

Personal Finance

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It’s easy to ignore finances during the holiday season. But with five weeks left in 2021, there’s still time for year-end moves to slash tax bills or boost refunds, experts say.

While tax planning is a year-round process, the last couple of months may offer the chance to finalize plans or pivot to better strategies, said certified financial planner Bryan Hasling, partner at Lodestar Private Asset Management in Alamo, California.

Here are some options to consider as the calendar winds down.

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Adjust withholdings

Those worried about owing money may still change how much their employer holds back from their last few paychecks. 

Filers may use the IRS Tax Withholding Estimator and provide their company with an updated Form W-4 with changes. Of course, a tax professional may provide the most accurate projection.  

Boost 401(k) contributions

Employees may also use remaining paychecks to boost pre-tax 401(k) or 403(b) deferrals, which lowers adjusted gross income.

The employee contribution limit is $19,500 for 2021, with an extra $6,500 for investors age 50 and older. 

It’s also a good time to plan for 2022 retirement savings, said Ashton Lawrence, a CFP with Goldfinch Wealth Management in Greenville, South Carolina, as the 401(k) limit jumps to $20,500 in 2022.

Tax-loss or gain harvesting

With another banner year for the stock market, investors receiving mutual fund payouts or taking profits from taxable accounts may seek losses to offset some of those gains. 

“If you are facing an unusually high-income year or had tremendous losses, this might be a good strategy,” said Lawrence.

And a married couple filing together with taxable income of $80,800 or less ($40,400 for single filers) for 2021 may consider selling profitable assets since they qualify for 0% long-term capital gains

Crypto loophole

The opportunity to harvest losses is greater for cryptocurrency investors who may experience more volatility before year end.

Currently, it’s easier to offset crypto profits with losses since digital assets don’t follow the so-called “wash-sale rule.”

The law, which applies to stocks and bonds, prevents someone from selling a losing investment to take a loss and rebuying it within a 30-day window to maintain exposure.

Year-end charitable gifts 

As the year-end approaches, philanthropic investors may consider a charitable gift, offering a write-off based on a percentage of their adjusted gross income if they itemize deductions.

“It’s important to be strategic if you want to maximize the tax benefit,” said Andy Baxley, a CFP and senior financial planner at The Planning Center, Inc. in Chicago.

Not all giving strategies are created equal in the eyes of the IRS.
Andy Baxley
Senior financial planner at The Planning Center

For example, someone may score a bigger deduction by donating appreciated assets, rather than giving cash, because it wipes out the capital gains taxes they would pay from selling.  

Another popular strategy may include gifts to so-called donor-advised funds, allowing an upfront write-off and gifts over time.

And retirees 70½ and older may transfer funds from an individual retirement account with a qualified charitable distribution. And once someone turns 72, they can use these types of transfers to satisfy yearly required minimum distributions.  

“Not all giving strategies are created equal in the eyes of the IRS, and the best one is going to depend on your situation,” Baxley added.

Changes in Congress

The House recently passed its $1.75 trillion spending package with a number of proposed tax reforms, including changes to the child tax credit, retirement rules for higher earners, the limit for the federal deduction on state and local taxes and more.

However, it’s difficult to predict how these measures may shift as the Senate begins negotiations. And many advisors suggest waiting for the final legislation before making any drastic moves.

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