Where has the summer gone! It is hard to believe that we are already into August, and before you know it, the end of 2021 will be upon us. With several months still left in the year, now is a great time to do some tax planning, while we still have time to make changes if needed. Here are a few key things to consider reviewing this time of year:
Review your pay stub: Make sure the taxes and deductions that you think are being done are correct. Did you want extra taken out for federal and state withholding? Is the right amount being taken out for your health insurance premiums, 401(k), etc.? If changes are needed, meet with your human resource department ASAP, as it sometimes takes a check or two before your changes are implemented. Quick note for newlyweds: If you were married in 2021, make sure to review your combined income to see if it will push you into a higher tax bracket. If so, you may need to increase your withholding so you will not be surprised when you go to file your taxes!
Optimize workplace retirement plan contributions: If you are working and have a 401(k), 403(b), etc., it is always a good idea to start saving through this plan. You will be surprised how much the account will accumulate over time, so you will have a nice retirement nest egg! The contribution limits for 2021 are $19,500 if you are under 50 years old, or $26,000 if you are 50 or older. If you cannot max out the contribution, you should at least contribute as much as your employer is matching, as you don’t want to lose any “free-money”. It is also a good idea to slowly increase your withdrawal percentage each year, so you can contribute more and not feel the effect as much in your net pay. Double-check: Make sure what is showing up on your pay stub is what your workplace plan is showing as YTD contributions. If incorrect, meet with your human resource department to get it fixed. If you are self-employed and do not have a retirement plan set up for yourself, you should look into opening a SEP or a Keogh plan. You have until the due date of your tax return (including extensions) to open and fund the account.
Contribute to an IRA or Roth IRA: While you have until the due date of your tax return, or April 15, 2022, to make your contribution for 2021, check to see if you are eligible and that you will have enough saved to make the contribution. For 2021, you can contribute $6,000 to either an IRA or Roth IRA. If you are 50 or older you can add $1,000 for a total of $7,000. If you are working and can contribute to a workplace plan, your contribution may be phased out based on your adjusted gross income (AGI). To deduct a traditional IRA contribution, phase-out begins at $104,000 if you file married filing joint or $65,000 if filing as single. For a Roth IRA, the phase-out begins at $196,000 and $124,000 respectively. If you have a non-working spouse, don’t forget to contribute to either a traditional IRA or Roth IRA (depending on your tax situation) on their behalf. Phase-out for their contribution is the same as the Roth IRA amounts.
Consider making charitable contributions: For 2021, we can deduct $300 per taxpayer (or $600 for a married filing joint return) for cash charitable donations, even if we don’t itemize. If you donate to a donor advised fund or are completing qualified charitable donations (QCDs) from your IRA – make sure you donate up to $600 directly to the charity to take advantage of the allowable deduction. Speaking of QCDs, if you are 70-1/2 or older in 2021, you can donate directly from your IRA to a charity and not have it count as income on your tax return. This is especially useful if you have to take your minimum required distribution. The QCD limit is $100,000 per taxpayer per year. If you are married filing joint, that is potentially up to $200,000 in QCDs that will not be taxed!
Use the benefits of a Health Savings Account (HSA): If you have a high deductible health plan and are not enrolled in Medicare, you can contribute to a health savings account (HSA): Up to $3,600 for self-only coverage and $7,200 for family coverage. You may add $1,000 to that amount if you are 55 or older. These amounts are not subject to income limits, so you can deduct contributions from your tax return. Whether you have the amounts deducted from your paycheck or contribute directly, you have until the due date of your return, or April 15, 2022, to max out your contribution. Quick tip: Any employer contribution counts toward your limit, so if maxing out, make sure you don’t over contribute.
Itemize your deductions: The standard deduction for 2021 is $12,550 for single taxpayers and $25,100 for married filing joint taxpayers. If you are close to itemizing, you may want to consider bunching certain deductions every other year, so you can itemize during some tax years. Deductions you can bunch are property taxes, charitable donations, and possibly medical expenses.
Some double-checking and planning now can save you in taxes when you file next year – good luck! Have questions about your individual situation? The team at Bloom Advisors is always here to help!