When is the best time to cut your income tax bill? Every day!
As we approach Halloween quickly, I think this will trigger some activities that should be addressed by those looking to pay less income taxes for 2021. Most Americans won’t break down any deductions due to the higher standard deduction allowed in the 2020 CARES Act. There are many other ways you can lower your Uncle Sam bill.
First, the easiest way to lower your tax bill is to pay yourself first. Before you get confused as you read the previous sentence, think about areas of tax law that will benefit you, such as tax law. If you are working with an organization that offers a retirement plan, review the plan documentation and determine if you can make additional contributions to the plan or at least increase your deferral for 2022.
The maximum amount of deferrals you can put on your employer’s plan depends on the type of plan being offered. For example, if your employer has a 401 (k) plan, did you pay in the maximum amount for your age?
If you are under 50, your maximum deposit limit is $ 19,500 for 2021. You don’t have to deposit this amount, but it is the maximum amount allowed. However, for those of us 50 years or older, an additional $ 6,500 make-up allowance is allowed in 2021. That is a total of $ 26,000 in income to be deducted from your 2021 taxable income. This is a valuable tax burden reduction … for now.
If you work for a company that doesn’t offer a retirement plan, consider contributing to a traditional IRA before April 15, 2022, 2021. If you’re 50 years or older, you can add an additional $ 1,000 to catch up.
If you’re self-employed and looking to save taxes in 2021, consider a SEP plan, a self-employed retirement plan. This plan is particularly useful if you want to contribute large amounts of money to increase your retirement savings.
The contribution cap for this type of plan for 2021 is $ 58,000 or 25% of your self-employed compensation, whichever is lower. If you want to create this type of plan, you must create and fund the plan prior to filing your 2021 income tax return, including deadline extensions.
Administratively, it is important to initiate the organization of your tax documents for the year. Don’t wait until April 15, 2022 to start this process. Your taxes get more complicated every year. I know it sounds good, but every time Congress passes a “tax simplification” bill, the Internal Revenue Code gets more confusing. Oh well. There are far worse consequences that can arise in life.
At the time of this writing, Congress was in a dispute over the size of a financial bill for infrastructure improvement, which is very broad in the bill. Is the amount $ 6 trillion, $ 3.5 trillion, or $ 1.5 trillion? No matter how fast you read the previous sentence, it’s a lot of money. What makes tax planning difficult for a given year is that the law is still changing in a rather chaotic manner.
My approach would be for Congress to set a deadline such as October 31 of each year for tax laws to be passed. This would give ample time to make changes to forms and the IRS software to accurately process the upcoming tax returns for the year. In the past two years, largely due to COVID-19 and the revival of the economy with three tax laws, the IRS has been inundated with an insurmountable task. Hopefully we will know the applicable tax laws for 2021 before the end of the year.
It is advisable to see your CPA or CERTIFIED FINANCIAL PLANNER ™ expert to get a grip on your tax burden before it becomes a real challenge. See you on the jogging track!
Principal registered securities offered by Cambridge Investment Research, Inc., a broker / dealer, member of FINRA / SIPC. Jimmy J. Williams is an investment advisor agent for Compass Capital Management, LLC, a registered investment advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 p. 3. Ste. 4, McAlester, OK 74501. Cambridge does not provide legal or tax advice. Please consult your legal and tax advisor for specific wealth and income tax planning strategies.