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Last Minute Tips Before Tax Day!

Last Minute Tips Before Tax Day!

March 25, 2022
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Fewer things are more reliable than tax day, even if the deadline has shifted around a bit in recent years. This year, it’s April 18th for most taxpayers, and recent legislation changes include substantial increases to standard deduction amounts and modifications to itemized deductions. Also, while RMDs (Required Minimum Distributions taken from your qualified plan) were suspended for tax year 2020, they were back in play for 2021, so be sure to include that information on your return, if applicable.

IRAs and Retirement Plans. Tax-advantaged retirement savings vehicles (such as your employer’s 401(k) and/or a traditional IRA) can help reduce your taxable income because contributions are made on a pre-tax basis. Those traditional IRA contributions may be fully or partially deductible, depending on your filing status and income, and your deduction may be limited if your income exceeds certain levels and if you (or your spouse) are covered by a retirement plan at work. While your contributions to your employer 401(k) plan cap out at the end of each tax year, you generally have until the April filing deadline to maximize contributions to an IRA. For 2021, limits are up to $6,000 for the year ($7,000 if you’re 50 years or older).

Health savings account (HSA). You can claim a tax deduction for contributions that you (or someone other than your employer) make to your HSA, even if you don’t itemize your deductions. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income, and the interest or other earnings on the assets in the account are tax-free. Distributions may also be tax-free if you pay qualified medical expenses. Your maximum contributions for the 2021 tax year are $3,600 for individuals and $7,200 for families, plus an extra $1,000 catch-up contribution for those aged 55 or older. Contributions for the 2021 tax year can be made up until April 15, 2022.

Timing is important. With the higher standard deduction amount for 2021, many folks who used to itemize are finding that it doesn’t make sense unless the total is more than the standard deduction amount. Consider grouping your “once a year” deductions into “twice the amount every other year” to accelerate your deduction totals and improve your tax liability. Similarly, you may want to defer income sources to future years if your tax bracket might be lower then.

If you DO itemize, here are two deductions that can impact your totals but are often overlooked:

  • Smaller, out-of-pocket charitable contributions. While larger deductions made via checks or payroll are hard to miss, the cost of stamps to mail out a school fundraiser flier or the miles driven in service of a charitable organization tend to fall through the cracks. Small expenses add up quickly, so don’t forget them!
  • Medical expenses not covered by your insurance. Medical expenses that exceed 7.5% of your adjusted gross income can be taken as a deduction. There is a very broad list of qualifying expenses to consider, including Medicare Part B and Part D premiums. So, find your receipts and tally the costs!

Legislation changes to note for the 2021 tax year:

  • Personal exemptions were eliminated.
  • Standard deductions substantially increased to $12,550 in 2021 ($25,100 if married filing jointly, $18,800 if head of household).
  • The overall limitation on itemized deductions based on the amount of adjusted gross income (AGI) was eliminated.
  • The deduction for state and local taxes is limited to $10,000 ($5,000 if married filing separately).
  • Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt.
  • The deduction for personal casualty and theft losses was eliminated, except for casualty losses attributable to a federally declared disaster.
  • For 2021, the child tax credit amount increased, the credit was extended to children age 17 and younger, and the credit is refundable for most taxpayers (if it exceeds tax liability).

Preparing your taxes is a year-long event, not just a one-day conquest. Staying organized throughout the year will help ensure that none of your deductions or contributions are overlooked or forgotten this time next year. We’re happy to work with your tax professional to be sure your financial plan aligns with your tax strategy, so please don’t hesitate to connect us!