Tax Saving Action to Take Now
December is a dichotomy for me. Many people manage tax planning changes in early fall. For far more people, December is the time of the year to scramble to make sure all tax documentation is in order. They rush to check documents, even as festivities and holiday parties abound. While I love holiday celebrations as much as the next person, excessive tax liabilities will outlast the toasts, hors d’oeuvres and twinkling lights. To counter that, Here is a brief list with the most common tax saving action or actions to complete before the end of the year to maximize savings.
Tax Saving Action #1: Check Your Tax Withholdings
This one is a simple item to check off. As a W-2 employee, even when it’s your company paying you, make sure you double check your tax withholdings. The self-service IRS Calculator is free and it’s easy to use. It is also a quick way to check whether the amount you withheld is the right amount from your pay. Grab your most recent pay statements (and your spouse’s), other income information, and your most recent income tax return.
If you do not withhold enough in taxes, you might be surprised by how much money you still owe when you file your income taxes. If you are withholding too much, you might get a larger refund, but you could be investing that money each paycheck. This tax saving action enlightens you on what to expect, allowing you to make an informed decision.
The calculator is a nice tool for most people, but when your tax situation is more complex, it is better to use instructions in Publication 505
Tax Saving Action #2: Donate to Tax Exempt Entity of Your Choice
Usually it makes sense claim your charitable donations only if you itemize your deductions. Before you donate, you can check the organizations Tax Exempt status by entering the organization’s name or employer identification number on the IRS Organization Search Tool. Under the CARES Act, you can now claim up to $600 for cash donations by non-itemizers. When you know how much to donate, you have another tax saving action to take.
Tax Saving Action #3: Contribute to your Retirement Savings
There is still time to contribute to y our 401K retirement account. You can still contribute until your last paycheck or December 31, 2021. The contribution caps only apply to what you put in. your employer’s contributions don’t count toward your aged defined additional 401(k) contribution limit. Employers may have a longer period to make matching contributions. IRA contributions are different. Those can be made until April 15, 2022.
Since we are mid-December, waiting is a bad idea. Act now to get the corrections onto your last paycheck of the year. Wondering who to contact? Normally, the human resource department of your employer handles that.
Tax Saving Action #4: Retrieve Any Reimbursements Due for 2021
If you have a Flexible Spending Account, (FSA), that reimburses your out of pocket expenses related to healthcare or dependent care costs with pretax money. Check with your employer on whether you need to use your FSA funds by December 31. If you fail to do so, you could lose those funds, unless your employer uses a rollover feature or offers a grace period. If you paid for healthcare and forgot to submit the paperwork, submitting now could be a nice reimbursement.
Tax Saving Action #5: Check your Stock Values
This one is not as clear cut as some of the other year end strategies. Check your stock values. Selling stocks that gained value and paying the capital gains taxes is a good strategy. If you are in a lower federal tax bracket, you might not need to pay capital gains tax. Even if you’re in a higher tax bracket, sometimes it makes sense to sell stocks doing well. Re-buying them as a way to reset the baseline stock price and reduce future capital gains taxes. Become informed to know which tax saving action will benefit you most.
Talk to your investment advisor if you already work with someone. If you don’t already work with an advisor, we should have a conversation. It costs you nothing but time and you’ll be glad you invested the time.