I’m going to go further than I did last week and offer you some tangible things you can do NOW.
And look … probably taxes aren’t the first thing on your mind now that the holiday lights are flickering. After all, it’s a happy season for every Chicago resident, right?
But if you want to be happy next spring, there are good moves you can make now, before the end of this year to make your next tax-filing merrier and brighter.
If any of these ring your holiday bells, and you want to get ahead of the game (and onto my calendar), use this:
Let’s get to it.
Abdalla Alyousef on Year End Tax Strategies
“By failing to prepare, you are preparing to fail.” – Benjamin Franklin
When it comes to end-of-the-year tax moves, one of the first things Chicago taxpayers want to do is figure out their federal tax bracket (we’re going to talk about federal taxes here – contact us for more specific help on the state bad boys). This is basically the chunk of your income Uncle Sam is going to want, and it depends on how much you make. These rates run 10% to 37% for 2021 and were recently adjusted for inflation.
Second, check your filing status for this year. If your marital status has changed, it’s never a bad idea to check that your form W-4 reflects that.
Next, check your expenses for the year to see if you can itemize tax deductions. (We’ll get into the specifics in a little bit.) You probably can’t take more than the new big standard deduction, but again, you never know.
And if your last tax filing gave you a nasty surprise or you had a big life change in 2021 (like having a baby), then double-check that Form W-4 at work to make sure your withholdings are on target. If you need it, we can help you figure this out.
General year end taxstrategies
Now for moves based on your above info.
Year end tax strategy #1 – Up or down? If you think you’re headed for a higher tax bracket in 2022, it’s a no-brainer to move any possible income from 2022 to 2021. By the same token, if you’re headed for a lower tax rate, put off any income you can into next year.
Year end tax strategy #2 – Land, lotsa land: Every deduction you can grab means less cash you have to part with. Sound good? Of course. And timing the deduction for your best advantage is the cherry on top. For instance, paying some or all of your Chicago property taxes early may mean you can get the federal deduction in 2021. (This does not work for everybody, especially if the alternative minimum tax is involved.) Accelerating a house payment can give you an extra bit of mortgage interest to deduct, too.
Year end tax strategy #3 – The right medicine: If you itemize, you can write off what you spent on qualified health expenses, but only the amount that’s greater than 7.5% of your income. You’d be surprised what expenses qualify, even transportation to the doctor.
You might be tempted to time medical stuff, but make sure any move is best for your health, too.
By the way, check your Flexible Spending Account for any money remaining there and then confirm your deadline for spending it. It may vanish after Dec. 31 or have a limited carryover.
Year end tax strategy #4 – Giving feels good: Under recent pandemic relief, there’s a new charitable deduction up to three hundred bucks for cash donations to a qualified charity – more for a couple filing taxes jointly – even if you don’t itemize.
If you’re a senior, you can make a qualified charitable distribution and give up to six figures straight from an IRA. No deduction here, but the money doesn’t count as taxable income.
Also, ask us about “bunching” donations. If your total annual itemizable deductions for 2021 will be close to your standard deduction, consider bunching them so they exceed the standard deduction in one year, and you then use the standard deduction in the next year. If you give regularly, it’s a great move, but it does take some planning.
Year end tax strategy #5 – Next egging: Feeding your traditional IRA or other retirement savings plan can really trim your taxable income. Max those accounts out ASAP.
If you’re staring at a higher tax bracket in 2022, consider a Roth conversion using money in your IRA. You’ll pony up tax as if the assets had been distributed from the traditional IRA, but your future Roth IRA distributions can be tax-free.
Profit and loss: Capital gains are profits in taxable accounts and capital gains tax is usually considered a wallop to avoid at all costs. But if your taxable income is modest for 2021, you might actually want to sell and realize some gains: The rate on sales for those with the lowest income can be just 15% – even 0%.
If your investments tanked in 2021? Generally, if your losses exceed your gains for the year, you can deduct up to three grand of the excess against regular income, carrying unused amounts to future years.
Again, your best tax plans depend on getting the most out of your individual situation. And that’s what we’re here for …
In your year-end corner,