As the tax year winds down, you might find yourself with a high tax burden that you want to reduce, or you might simply want to improve your chances of receiving a tax refund. In either case, you can take advantage of five last-minute tax hacks to reduce your taxable income with a tax deduction or credit. Some of these options involve contributing to tax-advantaged accounts or donating to a charity, while others target self-employed tax filers and investors.
1. Make Retirement Account Contributions
If you have a tax-deferred retirement plan such as a traditional individual retirement account (IRA) or 401(k), then you can get a tax break as a contributor. Your contributions amount can reduce your Adjusted Gross Income (AGI) and thus, your taxable income. However, traditional IRA contributions have limits for deductibility when you also make employer retirement plan contributions. You can contribute as much as $6,000 for IRAs ($7,000 if you're at least 50) and $19,500 for 401(k)s ($26,000 if you're at least 50) in 2021.
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As a bonus, you could get the Saver's Credit to get a tax break for contributions to these and other accounts like a Roth IRA. This credit has income limits of $33,000 if you're single and $66,000 if you're married filing jointly. Depending on your income, you could get a tax credit equal to 10 to 50 percent of your contributions (up to a max of $1,000 if single and $2,000 for married couples filing jointly).
Consider also: How Much Money Will You Need to Retire?
2. Make Charitable Donations
Since tax provisions changed with the pandemic last year, the IRS currently offers some tax savings for charitable contributions regardless of whether taxpayers take the standard deduction or itemize. For example, if you donate cash to a qualified organization and take the standard deduction, you can now deduct a maximum of $300 if single or $600 if married filing jointly this year.
If you itemize, you can deduct a variety of charitable donations such as cash, vehicles, household goods and even property. The IRS has various percentage limits (going up to 100 percent of your adjusted gross income for cash contributions) based on the donation type. So, your potential savings on federal income taxes can vary.
Consider also: Use the IRS Tax Exempt Organization Tool for Giving
3. Incur Necessary Small Business Expenses
When you fill out tax forms as a self-employed taxpayer, you can list your qualified business expenses on Schedule C and reduce your business's tax bill. So, it can help to make last-minute purchases of necessary supplies, services or equipment and get some tax benefits on your 2021 business tax return.
Some of these options involve contributing to tax-advantaged accounts or donating to a charity, while others target self-employed tax filers and investors.
If you're planning to prepay expenses for the next year, keep in mind that the IRS generally has rules against this except in certain cases such as prepaying 12 months of a lease or insurance premiums. So, you'll want to consult Publication 535 to see the possible tax effects of your expenses and verify eligibility.
4. Make Health Savings Account Contributions
Another one of the helpful tax savings hacks is to put money in a health savings account (HSA) if you have an insurance plan with a high enough deductible to qualify. The minimum deductibles for 2021 are $1,400 for individuals and $2,800 for families, while HSA contribution limits are $3,600 for individuals and $7,200 for families.
Maximizing these contributions helps you reduce your AGI by the amount you contribute and lower your income tax liability on tax day. Further, the money will grow tax-free and you'll incur no taxes even when you use HSA funds for medical expenses later.
Consider also: What Is a Health Savings Account?
5. Consider Tax-Loss Harvesting
If you've sold investments that have risen in value, the profit is subject to capital gains taxes. You might pay your usual tax rate if you sold the investments within a year of acquiring them, or a lower capital gains tax rate of 0 to 20 percent if you held them longer.
You can use tax-loss harvesting to reduce this tax liability by selling a poorly performing investment, buying a different investment and then using the loss incurred to offset your capital gains income. If your losses end up exceeding your gains, the IRS lets you use as much as $3,000 toward reducing your general taxable income this tax year. You can then carry forward any remaining losses for future tax savings.
Consider also: How to Calculate Capital Gains Taxes
- IRS: Year-End Giving Reminder: Special Tax Deduction Helps Most People Give Up to $600 to Charity, Even if They Don’t Itemize
- IRS: Retirement Savings Contributions Credit (Saver’s Credit)
- IRS: Publication 969 (2020), Health Savings Accounts and Other Tax-Favored Health Plans
- IRS: Charitable Contribution Deductions
- IRS: 2021 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work
- IRS: IRS Announces 401(K) Limit Increases to $20,500
- IRS: Schedule C
- IRS: Publication 535 (2020), Business Expenses
- Charles Schwab: How to Cut Your Tax Bill With Tax-Loss Harvesting