After December 31, the calendar year has passed. That means most financial decisions you should have made is too late. You don’t want to be in the situation telling yourself when you’re filing your taxes that you should have done something different with your finances and it’s too late. What are some of the things you can do before the end of the year to help with your tax return?
Donating items or money are charitable gifts and you can request a contribution receipt. These contributions are tax deductions you can claim on your tax returns. If you offered tithe to a church, donated items to the Salvation Army, or other non-profit, you can claim a tax deduction.
Contribute to retirement accounts
In 2021, the maximum pre-tax retirement contribution is $19,500 which is pre-tax contributions. If you are not contributing to the max limits, you can increase your contributions and it will reduce your adjusted gross income which can lead to less taxes. After-tax retirement accounts like a Roth IRA don’t give you any tax benefits today, however later on when you do withdraw your funds, it will be tax exempt. You have a maximum contribution limit for a Roth IRA account so if you are eligible to make Roth IRA contributions, it could be worth it in the long run. In the early months of a new year, you can contribute to a Roth IRA account for the previous year. When you making a contribution, you can apply it to the current year or a previous year.
A Roth Conversion is moving funds from a pre-tax IRA account into a Roth IRA account. Since an IRA is pre-tax, you will have to pay taxes on the conversion amount at your current tax rate. There are pros and cons to doing Roth Conversions. I did my first Roth Conversion this year and some might think I’m crazy because the amount I converted is going to be taxed at my current rate. I do have my reasons, primarily I don’t want to be stuck paying large amounts of taxes in retirement when I’m forced to take required minimum distributions (RMDs).
Gift your money
If you have cash money you want to give to your children, relatives, or even friends, you can gift money up to $15,000 without incurring gift tax. You can gift to as many people as long as you don’t give more than $15,000 per recipient. So, if you had 3 children and you wanted to give them $15,000 each, you can without having to pay a gift tax.
Sell your negative stocks
If you invested in a stock and your investment is negative, think about selling that stock and claim a loss on your taxes. Today, the maximum you can deduct is $3,000 each year. If your negative loss is more than $3,000, that remaining loss can be carried over to the following tax year and so on until you’ve claimed the entire loss amount.
After the calendar year passes, there is little you can do when it comes to changing your finances for that past year. I look at my earnings statement or pay stub to do some estimated calculations and figure which tax bracket I’m going to fall into. If I’m at the borderline of a tax bracket, I’ll do as much as I can to keep my tax rate at the lower tax bracket. Don’t be in a situation where you’re saying you wished you donated more or contributed more to your retirement accounts because it’ll be too late. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook, Instagram, and Pinterest.
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