So what’s on your mind this time of year? If you’re like most people, you’re probably thinking of the holidays. But there’s something less enjoyable that should be on your mind: taxes.
That’s because this is the last chance you’ll have to make some of the key decisions that will affect how much you pay or get back when you file your taxes next year. Don’t make the mistake of waiting until April 18th when it will be too late. It’s also a great time to set yourself up to reduce your taxes in 2022. Here are some questions to ask yourself along with some last minute steps you can take to reduce your taxes:
1) Do you have any money left in an FSA? Although some plans allow you to roll over $550 to next year, you generally need to use it by the end of the year or lose it. If you’re in danger of losing any of it, see if you can use the remaining balance to stock up on eyeglasses, contact lenses, prescription medication, etc. You may also want to adjust how much you contribute next year so you don’t end up losing 100% of your unused balance to save 24% of it in taxes.
2) Did you have high medical expenses this year? If your medical expenses exceed 7.5% of your adjusted gross income (AGI), you may be able to deduct them on Schedule A of your tax return. If you will exceed or be close to this amount, you might want to incur any medical expenses you pay out-of-pocket by the end of this year so you can deduct them from your taxes as well. Examples might be an exam or a procedure you’ve been putting off (especially since hospitals may reduce availability for procedures due to COVID-19). If your health won’t stop your procrastinating, maybe a tax break will.
3) Are you worried about having a taxable estate? (Taxable estates will begin at $12.06 million next year so it’s a nice problem to have.) One way to reduce your estate tax liability is to gift up to $15k per person each year without it counting against that limit. So if you haven’t maxed out the $15k, go ahead and go all out this Christmas!
4) Do you have any investment losses in a taxable account? (This is less of a nice problem to have.) If so, you can turn those investment lemons into tax lemonade by selling them and using the losses to offset any capital gains taxes you owe and even deduct the excess losses off your regular income taxes (up to $3k a year with the remainder carried forward indefinitely). You’ll want to reinvest the proceeds so you don’t miss any future gains but be careful. You won’t be able to deduct the losses if you purchase the same or virtually identical investment within 30 days of the sale so reinvest it in something else. You can always wait until after the 30 days if you want to repurchase your original investment.
5) Have you made any charitable contributions or plan to this holiday season? Make sure you keep the receipt since you can deduct contributions of cash gifts up to $300 per person for 2021 even if you don’t itemize. If you itemize, you can deduct gifts to qualifying organizations of up to 100% of your AGI for cash gifts and 30% of your AGI for noncash gifts for 2021.
6) Think your tax bracket may be lower next year? You may want to accelerate some expenses so you can deduct them this year instead. Some examples of deductible expenses you can make in December are a January mortgage payment, a last estimated state income tax payment, and purchases for a small business.
7) Do you max out your retirement plan? You may want to increase your contributions next year to account for the higher limits that are taking effect. You’ll be able to contribute $20,500 for 2022 in total pre-tax and Roth contributions plus an additional $6,500 if you turn 50 or older next year.
As you can see, the end of the year isn’t just about the start of winter, the holidays, and ugly sweaters. It could also be your last chance to take some steps that will reduce your taxes. Why else would they call it the season of joy?