The end of the year is all about holidays. So who wants to burden themselves thinking about the huge tax bill they have to pay? What if a few simple financial decisions you make before the year-end can save you thousands of dollars? As well as, reduce your tax bill. Putting in some effort into things like giving to charity, reaping the benefits of tax-loss harvesting, and investing in a health savings account can save you from losing the money you could put to good use.
The Build Back Better Act of Congress is constantly changing tax rules to bring more equity between the riches and the middle and lower class taxes. While some Democrats say Congress will impose tax hikes on the rich before Christmas, you can take the time to reduce your tax bill by following these seven tips.
Contribute to Charity
What’s a better use for your money than giving it to charity and lowering your taxes at the same time? The charity contribution deduction means that you can give more to the charity at a lower net cost. Standard deduction doubled after the 2017 tax rules, which caused most people not to itemize their tax returns. However, you can still receive a significant tax deduction if you contribute to charity before December 31st.
Taxpayers in 2021 are basically gifted with the pandemic CARES act 2020. Which allows an extension of $300 per person if you donate to charity. For a couple, the amount doubles, which means they can take a deduction of $600 on their joint account. Remember that these deductions are only valid for cash contributions. Donations like clothes, food, or any household item are not considered under the standard deduction rule.
You must keep a record of your charitable contributions to avoid misconceptions when paying your taxes. A written acknowledgment from the charity organization stating the date donated amount, and any other detail should be enough to prove your donation’s eligibility for the standard deduction.
Distribute Among Family and Friends
You can give up to $15,000 to your family members, including kids, grandkids, and their spouses. The annual gift tax exclusion allows you to distribute your money to your family members. Which will exempt you from federal gift tax in 2021. The tax exclusion is likely to rise in 2022 to $16,000. Make sure that you distribute your annual tax gift as soon as possible, so the bank can clear the check before the year ends.
Another way to reduce your tax bill by distributing money to your family is by paying for their educational or medical fees. You can pay an unlimited amount, but the transfer has to be made directly from your account to the institution’s account. For example, you can’t send the money to your son’s or daughter’s account so they can make the final payment.
Pay Next Year’s Bill Now
If you plan to itemize or claim your standard deduction for your 2021 tax return, this is the perfect time to pay your expenses due at the start of the next year, such as medical bills, education fees, mortgage payments, etc.
Check Your Medical Expenses
Collecting unreimbursed medical expenditure to deduct your tax is out of bounds for most people. This is because you can only claim a tax deduction if your medical expense is greater than 7.5% of your total gross income. Most people find their medical bills under the threshold. Still, if you’ve had enough outstanding medical bills due to an unfortunate condition, you may be able to collect the standard deduction.
Pay Your Education Fee in Advance
Parents who have college-going children can pay their tuition fee in advance for the first quarter to lower their tax bill. You don’t need to itemize this claim to claim a standard deduction on your tax. You automatically qualify for the American Opportunity Tax Credit that allows you to have a tax credit of up to $2,500 per student in their first four years of graduation. A married couple can claim up to $160,000 of full credit, given that they are filing jointly with the modified adjustment joint income.
Invest In 529 Education Savings Account
Parents and grandparents can stash their money in a 529 education savings account to claim the deduction through annual gift exemption. They can contribute to an unlimited number of children even if college is far from their current educational status. Even if one of their children is in college, they can easily make them the beneficiary. And then add others as their family needs evolve.
However, the money you contribute will not directly lower your taxes. But it will become tax-free whenever used for educational purposes. Moreover, if you have the means, you can put in up to five years of annual gift exemption amount at once.
Open a Health Savings Account
Funding in a health savings account allows you to save tax money most efficiently. These are the most versatile accounts for you to invest money that will grow tax-free. And exempt from tax when used for medical expenditures. You can contribute $3,600 as an individual or $7,200 for family coverage. In addition, you can top up with $1,000 if you’re 55 or older.
Take Advantage of the Tax Loss Harvesting
You can take advantage of the losses on your taxable investment accounts. These accounts have proportional gains and losses, so pay attention to them towards the end of the year. For example, A long-term capital loss will offset long-term profit, similar to the short-term loss. You can claim $3,000 as a standard deduction on your tax returns to carry it forward the next year.
Check Your Withholding
You need to pay your taxes in estimates every quarter if your income is through gigs such as selling stocks at a profit. The quarterly payment date for year-end 2021 is January 18th, 2022. If you missed out on making payments quarterly, you would be weighed down with additional amounts due to penalties. However, you can pay with your year-end bonus before 2022, and it will be considered for all four quarters.
You can save up your money from being eaten up by your tax bills. Or invest them purposefully for your retirement life. However, these tips are not intended to be used in any way to evade taxes. Willful blindness in relation to tax crimes can cause serious damage to you and your savings.