As you know, April 15th is the tax deadline, and because of that, many people deem springtime “tax season.” But waiting for the new year isn’t always the best way to approach your taxes, and I’ll give you two reasons why.
First, you won’t have time to implement ideas that need to be put in place before the end of the year. Second, you won’t have as much time to consult with your accountant. As a result, your tax strategy may not be as effective as it could be.
In fact, the best time to start planning for tax season is in November or even early December--you’ll have a good idea of how your year is shaping up, but you still have time to make adjustments before it’s over. Here are a few methods you could consider. Let me know if you would like to discuss any of these options--I’m always happy to talk taxes, regardless of the month!
1. Get rid of disappointing investments.
Selling underperforming taxable investment assets--like mutual funds, bonds, and stocks--will lower your tax liability. Selling turns paper losses into realized losses, and if your realized capital losses outweigh your realized capital gains, then you can apply up to $3,000 of losses to the gains. You can even carry over the rest.
This process, called tax-loss harvesting, allows you to keep more money invested, since you will be paying less in capital gains taxes. Over time, if you invest well, your investments will grow and compound enough to more than cover the losses.
2. Make charitable donations.
When you donate to a registered nonprofit, you may be able to write off that money. Not only are you lowering your tax liability, but also you’re making the world a better place.
If you don’t itemize, you can still deduct up to $300 (if filing individually) or up to $600 (if married and filing jointly).
3. Max out your 401(k)--or do what you can.
Not only does this help you prepare for retirement, but also it helps you pay lower taxes in April. 401(k) contributions are pre-tax, meaning you won’t pay taxes on them now even though you earned that money this year.
You have to make all your 401(k) contributions for 2021 by New Year’s Eve. If you’re 49 or younger, your maximum contribution is $19,500. If you’re 50 or older, it’s $26,000.
These are just a few possible ways to reduce your tax payment.
Let me know if you would like to discuss any of these options--I’m always happy to talk taxes, regardless of the month!
Schedule your appointment today and let’s chat!