End-of-Year Financial Moves to Reduce Your Tax Liability
With the year nearly at an end, the 2022 tax season is just around the corner. Amid all of your holiday preparations, it can be hard to focus on something like your tax return, but now is one of the best times to make sure that you have everything in order for your taxes. That’s because, when that ball drops on New Year’s Eve, there will be very few things you can do to reduce your 2021 tax liability. Right now, however, there are still a few moves you can make that could put you in a better financial situation when you file your return.
Make Charitable Contributions
‘Tis the season of giving, isn’t it? If you find yourself right above the threshold for a higher tax bracket, making a contribution to a qualifying charitable organization can be both a gesture of good will and a way to lower your tax rate. Of course, you’ll have to weigh the pros and cons of this with your CPA and determine just how much you’d have to contribute, as well as how much that contribution would save. Still, many people find that giving money to a cause they care about is a better way to use their funds during the holiday season, rather than losing that money to taxes in a few months.
Contribute to Retirement Accounts
If you haven’t maxed out your retirement accounts. This is a great way to quickly reduce your tax liability while still actually retaining your funds. Contributions to 401(k)s and your traditional IRA can be deduct on your 2021 tax return. Note, however, that Roth IRAs do not provide you with an immediate tax deduction; rather, those funds are not taxed when you withdraw them in your retirement.
Unlike many other financial moves, contributions to your retirement actually can be made after the New Year. You can claim a 2021 tax deduction for any qualifying retirement contributions made on or before April 15, 2022.
Contribute to an HSA
Another account you can put funds into in exchange for a tax deduction is a Health Savings Account (HSA). Speak to your employer or insurance provider to see if you qualify for an HSA, if you don’t already have one; only individuals with a qualifying high-deductible health plan are eligible. Contributions to HSAs are tax-deductible, and withdrawals for eligible medical expenses are tax free as well.
Use the Qualified Business Income Deduction
This is actually a move you need to make when you file; however, it’s a good idea to research this deduction and speak to your CPA about whether or not you qualify for it now. If you are a business owner or sole proprietor, and your income is less than $315,000, you can deduct 20% of your income before you even start itemizing your other business deductions. If your business income is over this amount, the deduction diminishes until it completely phases out for business income over $415,000.
If you do qualify for the qualified business income (QBI) deduction, your business tax savings can be quite significant. So, start looking into this deduction, if you’re not aware of it already, and speak to your accountant about claiming it on your 2021 business tax return.
Sell Unprofitable Stock
Even those with a very basic understanding of investing know that the goal is “buy low, sell high.” But, naturally, that won’t always happen. While you probably aren’t eager to sell your stock off at a loss, there are times where it’s best to dump unprofitable investments and move on to other opportunities—and right now could be a good time to do it. Selling stocks at a loss can qualify as a deduction on your taxable income and reduce your overall tax liability. However, you should consult with your CPA on this before you sell off your stock; just make sure you have that discussion so you can make your move before the end of the calendar year.
Have a Tax Planning Meeting
Speaking of having a discussion with your CPA, this is something every taxpayer should do—whether you’re planning to sell off stocks this year or not. Sitting down with your accountant now allows you to examine your return and find other last-minute changes you can make before the end of the year to potentially reduce your overall tax liability. The vast majority of deductions you can claim on your return must be done before the end of the year. So, get your accountant’s input now, so you can have enough time to make those financial moves before the ball drops.
Give us a call today to schedule your tax planning meeting with our experienced and knowledgeable CPAs.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174