No matter what Congress decides in Washington, don’t wait to plan
As the year winds down, it’s time to get your documents in order and make strategic decisions for your taxes. Of course, a lot of tax policy is hanging in limbo right now, and we really don’t know what rates are going to be next year.
No matter what Congress decides to do in Washington, you would be well-served by taking these tax-planning steps right now.
Tax Planning Tips
Here are some thoughts for those of you who want to start working on that tax plan:
- If you have any control over what your income is for 2021 and 2022, now is the time to figure out if you want more or less income in 2021 or if you want to move it into 2022.
- If you are able to make contributions to a 401(k), based on your self-employed earnings, be sure to have the necessary documents completed by December 31st even though you do not have to make the contribution until next year.
- Will you have enough in all Schedule A deductions to get over the limit for the standard deduction amount? For 2021 taxes, the standard deduction is $12,550 for singles ($12,950 for 2022), $18,800 for heads of household ($19,400 for 2022) and $25,100 for married filing jointly taxpayers ($25,900 for 2022).
Did you remember that the standard deductions were almost doubled with changes from the Tax Cuts and Jobs Act for 2018? As such, through 2025 (when the Tax Cuts and Jobs Act will be in effect) the number of taxpayers for whom itemizing will pay off is likely to drop significantly due to the much bigger standard deduction.
For example, the personal exemption disappeared, which might actually offset this effect for some taxpayers. But the flip side is that the child tax credit doubled and applies to more families.
The Easily Overlooked Ones
Here are several other issues to consider:
- If you make charitable contributions, decide whether to make them this year or next. If you are itemizing for 2021, then date and mail the checks by December 31, 2021.
- If you can get a medical expense deduction because your medical expenses exceed 7.5% of your adjusted gross income, try to pile as much medical care as you can into this year. Get eye exams, glasses, dental work, year-end doctor visits and tests before year-end. Remember, miles that you drive to get medical care and pick up prescriptions count toward the medical expense deduction.
- This might be a good time to do house cleaning and donate things that you don’t need. Be sure to make a list, get the values documented and get the items to the charity of your choice. Save that receipt.
Don’t Forget Retirement Contributions
Apart from planning your deductions, now is a great time to figure out if you are able to contribute to a Roth individual retirement account in addition to the amounts you are contributing to your 401(k) or 403(b) or other tax-deferred program at work.
For most of us, the Roth IRA is a very valuable part of retirement planning. It is easy to set up with a mutual fund company so you can contribute an amount every month so that by the end of 2022, you have it all taken care of.
So get your 2021 pay stubs together and do a little tax planning for 2021 and 2022 this month.
If you have some questions or need help, talk to a financial professional to help get your plan inked out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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