It’s the last week of the year, which means it’s your last chance to save big on taxes. By donating to charities or changing your investments, you could save thousands in tax liability.
Here are 10 end-of-the-year tax tips, courtesy of TurboTax CPA and tax expert Lisa Greene-Lewis:
1. Defer bonuses
If your hard work paid off and you expect a year-end bonus, this extra money may bump you up to another tax bracket and increase the amount of taxes you owe, according to Greene-Lewis. To avoid that, you may want to consider delaying the extra income until the beginning of next year, Greene-Lewis says.
If your boss can pay your bonus in January, you will receive the money around the same time, but it won’t be part of your 2021 taxable income, Greene-Lewis says.
2. Accelerate deductions and defer income
There are a handful of tax deductions that are recognized in the year in which you pay them, Greene-Lewis says. For example, if you own a home, you can deduct your mortgage interest. And if you make an extra mortgage payment on Dec. 31, you may be able to claim the interest in that payment on your 2021 return, according to Greene-Lewis.
Before doing this, be aware that under the Tax Cuts and Jobs Act passed in 2018, if you purchased a home after Dec. 15, 2017, you can deduct up to $750,000 in total mortgage interest instead of $1,000,000 for homes purchased before then, according to TaxAct, an American tax preparation software company.
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3. Donate to charity
If you itemize your deductions, you can help someone in need and reap the benefits of a tax deduction for non-cash and monetary donations given to a qualified charitable organization, according to Greene-Lewis.
Make these donations count on your taxes by donating by Dec. 31. If you make a donation by credit card, you do not have to pay it off in 2021 to receive the deduction, Greene-Lewis says.
If you volunteer at a qualified charitable organization, don’t forget that you can also deduct mileage (14 cents for every mile) driven for charitable service, according to Greene-Lewis.
Under the CARES Act, even people who take the standard deduction can take advantage of a deduction for cash donations of up to $300 made to a 501(c)(3) organization, and that doubles to $600 for married couples filing jointly, Greene-Lewis says.
This is something to keep in mind because close to 90% of taxpayers now claim the standard deduction, which means they cannot otherwise deduct charitable contributions, according to Greene-Lewis.
The CARES Act temporarily eliminated the limit on the amount of cash contributions you can deduct if you itemize. Usually, deductions for cash donations are limited to 60% of your adjusted gross income, according to Greene-Lewis.
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4. Maximize your retirement
Another great way to reduce your taxable income while building your nest egg is to make a contribution to a 401(k) or a traditional IRA, Greene-Lewis says. If you are self-employed and contribute to a SEP IRA, you can contribute up to the lesser of 25% of your net self-employment income or $58,000 for 2021, Greene-Lewis says.
5. Spend your FSA
If you have a Flexible Spending Account and have money left, get caught up on your doctor’s visits, Greene-Lewis says. While the old “use it or lose it” rule does not apply, you may be able to carry over only $550 in your 2021 FSA account at the end of the year, Greene-Lewis says.
6. Buy high, sell low
If you have investments that have gone down in value, did you know you can lock in your losses and use them to offset investment winners? To do this, you need to sell the losing investments, according to Greene-Lewis. If your losses exceed your gains, you can apply $3,000 of that loss against your regular income, and any remainder will be passed to the next tax year, Greene-Lewis says.
7. Make adjustments in W-4 withholding
Maybe you did not have the tax outcome you were expecting in 2021 due to changes in tax laws or because you experienced life changes like having a baby, getting a pay increase or decrease, losing a job or getting a new one. If so, this is a good time to adjust your withholding on your W-4 form and refile it with your employer, according to Greene-Lewis.
8. Be aware of the ‘other dependent credit’
Do you support your parents or grandparents? How about another loved one? If that happens to be you and they qualify as a non-child dependent, make sure to take advantage of the new “Other Dependent Credit.” This can reduce the taxes you owe dollar-for-dollar, up to $500, Greene-Lewis says.
9. Gather receipts related to property taxes or large purchases
Do you pay property taxes on your home or state income taxes? Did you pay a lot in sales tax for a large purchase? You can deduct state and local property, income or sales taxes, up to $10,000. In the past, these taxes were generally fully tax-deductible, Greene-Lewis says.
10. Take a class
Taking a course to advance your career or improve skills is a great way to lower your taxes, Greene-Lewis says. Paying for next quarter’s tuition by Dec. 31 may give you a tax credit of up to $2,000 per tax return, with the Lifetime Learning Credit, Greene-Lewis says.
Michelle Shen is a Money & Tech Digital Reporter for USA TODAY. You can reach her @michelle_shen10 on Twitter.
This article originally appeared on USA TODAY: How can I reduce my taxable income at the end of the year?
Source: finance.yahoo.com