3 Ways to Slash Your 2021 Tax Bill Before the End of the Year

The holiday season is almost upon us and that means the far less enjoyable tax season is just around the corner. Before too long, we’ll have to hash out our 2021 income and expenditures with the government and hope we don’t get slapped with a surprise bill. Luckily for us, there are some things we can do to reduce how much we owe the government. Here are three moves that can help you save big on your 2021 taxes.

1. Contribute to your retirement accounts

Traditional tax-deferred retirement account contributions to vehicles like traditional IRAs and 401(k) plans reduce your taxable income for the year. For example, if you earn $50,000 in 2021 and you contribute $5,000 to a tax-deferred account, the government won’t tax you on that $5,000 right now. You’ll only owe income tax on the remaining $45,000.

Image source: Getty Images.

But this doesn’t apply to Roth accounts. Roth account contributions offer tax-free withdrawals in retirement, so you don’t get a tax break now. Contributing to one of these accounts could be smart if you’re concerned about taxes in retirement, but you’ll need to stick to a tax-deferred account, like a traditional IRA or 401(k), if you want the savings this year.

Retirement savers who qualify for the Saver’s Tax Credit could knock even more off their tax bill. This is a tax credit, so it offers a dollar-for-dollar reduction of what you owe. How much you get depends on your income, tax filing status, and how much you contribute to a retirement account this year. The maximum credit is worth $1,000 for individuals or $2,000 for married couples. That means if you owed the government $3,000 in taxes and qualify for a $1,000 tax credit, you now only owe the government $2,000. If you’ve already paid more than you owe throughout the year, the rest comes back to you as a tax refund.

2. Make a charitable donation

Charitable donations can also reduce your taxable income for the year, but only if they meet certain criteria.

First, your donation must be to a qualifying tax-exempt organization. If you’re unsure whether an organization qualifies, see if you can find them in the IRS’s Tax-Exempt Organization Search tool.

Second, you need to document your donations. Make sure you get receipts from the organization you donate to or keep your bank or credit card statement showing the donation. You don’t have to submit this when you file your taxes, but if you get audited and can’t provide proof of your donation, the government can disallow it.

Third, you need to make your donations before the end of the year if you want to claim the deduction on your 2021 tax return. A pledge to donate isn’t enough. You have to actually contribute the funds or goods before Dec. 31, 2021.

Normally, you have to itemize your deductions in order to claim a tax break for charitable contributions, and you may only deduct up to 60% of your adjusted gross income (AGI). But in 2021, there’s a special rule that enables individuals claiming the standard tax deduction to deduct up to $300 for charitable contributions. Married couples may claim up to a $600 charitable contribution tax deduction without itemizing.

3. Tax loss harvesting

Tax loss harvesting is where you sell off some of your investments at a loss to offset the capital gains you’ve gotten from selling other investments at a profit. For example, if you purchase a stock for $100 and sell it a year later for $200, you have a $100 capital gain that you’d ordinarily have to pay taxes on. But if in the same year you sold the profitable stock, you also sold off some poorly performing stocks at a loss of $50, the government would only tax you on the difference between your total capital gains and your losses — in this case, $50.

It’s possible to slash your tax bill by up to $3,000 this way. If your losses exceed $3,000, you can’t write off any more on your 2021 taxes, but you can carry the extra over into next year.

This strategy isn’t right for everyone, though. Single filers earning less than $40,400 and married couples earning under $80,800 in 2021 won’t owe taxes on their capital gains anyway, so this strategy may not be as beneficial for them as it would be for someone in a higher tax bracket.

You also don’t want to throw off your whole investment strategy just to save a little on your tax bill. If a strong company’s stock takes a short-term dip, that doesn’t mean you should sell it so you can claim it as a loss. You might think that you can just buy it again a little later when it starts doing better, but you can’t.

Buying the same or a nearly identical stock to the one you recently claimed as a loss on your tax return is known as a wash sale, and it can land you in a heap of trouble with the IRS. So if you think a company is a smart long-term investment for you, you’re probably better off holding onto it rather than selling for a short-term tax deduction.

The three tips above are some of the most common ways to save on your taxes, but you have to make these moves before the end of the year. Set aside an hour or two to look over your finances and figure out which of the above moves makes sense for you. Then, make sure you keep track of your retirement contributions, donations, and tax losses so you have that information ready when you go to file your 2021 taxes.

10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 6/15/21

The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published.