November is usually the month that we pay attention to year-end tax planning. We recommend that you calculate your total income this year and see what you can do to reduce it. With all the political wrangling going on in DC, it’s hard to know whether there will be tax savings changes before December 31st. Remember, no legislation that will change current taxes has passed. Each time it looks as if the deal making is done, a different politician starts pushing their agenda.
What we do know right now is that last year’s rules still count. Here are some reminders:
- IRA & other retirement account Distributions must be taken this year by December 31st. Those who are 70 ½ or older can transfer up to $100,000 per year directly from an IRA to an eligible charity without paying income tax on the transaction.
- If it makes taxable sense, you should seriously consider to turn part of your IRA into a Roth.
- We have to remember that 2021 tax brackets are still lower than they were in the past and in 2025 they will revert back to previous levels.
- Did you make the maximum contribution to your 401k or 403b? You can contribute up to $19,500, plus $6,500 in catch-up contributions if you’re 50 or older; a total of $26,000 is a nice reduction of your taxable income.
- If you or your spouse have self-employment or freelance income and no employees, open a solo 401(k) plan. This allows you to save more tax-deferred money than a SEP IRA. You must open it by December 31, although you have until April 15, 2022, to contribute and take a tax deduction for 2021. You can make the same $19,500 contribution (plus $6,500 if you’re 50 or older), but also, you can contribute about 20% of your net self-employment income in the plan (up to $58,000, or $64,500 if 50 or older). This is a great way to lower your taxes.
- For traditional IRAs and Roth IRAs, you can contribute $6,000 ($7,000 if you’re age 50 or older).
529 plans: Did you contribute to a 529 plan to get a State tax break? Up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing New York taxable income. Not all states allow this deduction (check with your state). It might still be a good way to save for college costs as you will not pay taxes on the earnings when it is used for qualified expenses.
Investments: If you have some losses in your portfolio due to the wild stock market swings, share your pain with the IRS and offset losses against gains or you can take up to $3,000 in capital losses against your income. If you have more realized losses in your account, you can carry them over to future years. If we are managing your money, we will go over your accounts to see what tax management we can do.
Anja & Clare
