End-of-the-Year Income Tax Checklist

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End-of-the-Year Income Tax Checklist

Every year, we hear the same things about what we should do by December 31 to save money on our taxes the following April. In this post, we’ll discuss several things you should consider about before December 31st, as well as some lesser-known tax-saving methods and tactics. We’ll also discuss some of the reasons against doing things like paying property taxes and the January mortgage due in December.

Key Takeaways

  • Understand your filing status and how it affects your eligibility for tax credits.
  • Make sure to invest for retirement and take advantage of tax breaks.
  • Required minimum distributions (RMDs) from retirement funds begin at the age of 72 if you are 70 12 or older in 2020 or later.
  • If your current-year medical costs approach the minimal level of 7.5% of your AGI, it may be prudent to consolidate expected future medical expenses into the current year to maximize your tax savings.
  • Planning specific expenditures in the higher-tax bracket year is a sensible tax-planning technique if you anticipate a shift in income tax rates.
  • If you feel you may be subject to the Alternative Minimum Tax (AMT), a tax advisor may assist you in minimizing its impact.

Your 2021 Year-End Checklist

Here are some things to think about towards the end of the year in preparation for the 2021 tax filing season.

Know Your Filing Status

There are various methods for filing your taxes. You may file as a single filer, head of household (HOH), married filing separately (MFS), or married filing jointly, depending on your marital status and dependant position (MFJ).Each of them has various tax brackets, basic deductions, and eligibility for specific tax benefits.

Most significantly, you will be unable to claim some school tax credits if you utilize the tax status MFS.

Retirement Planning

Keep in mind the yearly contribution restrictions for employer-sponsored retirement programs like 401(k)s and 403(b)s. For most workers, the cap for 2021 is $19,500 ($20,500 for 2022). Employees above the age of 50 are eligible for an extra $6,500 catch-up contribution. If you fulfill certain criteria, you may also be able to deduct payments to a conventional IRA.

  Alternative Minimum Tax (AMT) Definition and How It Works

RMDs, which were suspended in 2020 owing to the coronavirus pandemic, have been reinstated for 2021. If you are above the age of 70 12 or 72, depending on your birthday, be sure you have withdrawn RMDs from your retirement account. The SECURE Act of 2019 changed the minimum RMD age, so if your 70th birthday happened on or after July 1, 2019, you are not required to withdraw an RMD from your retirement account until you reach the age of 72.

If you did not reach the age of 70 12 in 2019, but are 72 before the end of 2021, your first RMD is due on April 1, 2022, and the second on December 31, 2022. To avoid making two withdrawals in the same tax year, take your first RMD before December 31, 2021.

Itemized or Standard Deduction?

It’s a good idea to calculate your possible itemized deductions before the end of the year so you can decide whether to itemize or accept the standard deduction. You should itemize costs on your tax return if your itemized deductions surpass the standard deduction for your tax status.

Here’s the standard deduction amount:

  • Individual: $12,550 in 2021 ($12,950 in 2022)
  • Head of Household: $18,800 ($19,400 in 2022)
  • Separate Filing: $12,550 for 2021 ($12,950 for 2022)
  • Married Couple Filing Jointly: $25,100 in 2021 ($25,900 in 2022)

If you want to itemize, gather all of your supporting documentation for your qualified costs. Furthermore, if you’re itemizing, you may wish to group medical spending into the current year before December 31.

Bunch Medical Expenses In One Year

Medical and dental costs are only deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI).If your AGI is $50,000 and you have $7,000 in eligible medical and dental expenditures, you cannot deduct the whole amount from your taxable income; you may only deduct the expenses that exceed 7.5% of your income. You may deduct $7,000 – $3,750, or $3,250, since 7.5% of $50,000 equals $3,750.

It’s preferable to be able to claim anything than to lose out totally on this deduction. So, the months of November and December are ideal for reviewing your actual medical costs for the current year as well as your projected medical expenses for the following year.

  Form 9465: Installment Agreement Request Definition

If you’re on the verge of exceeding the 7.5% threshold for the current tax year, Scott M. Estill, author of the bookTax This! An Insider’s Guide To Standing Up To The IRS and a former senior trial attorney for the IRS, recommends deferring purchases of eyeglasses, dentist and doctor visits, surgical procedures, and other medical and dental expenses until December (IRS).Similarly, if you have minimal medical and dental bills during the current tax year, postpone what you can to the following.

LASIK eye surgery, doctor-prescribed weight reduction programs, smoking cessation programs (but not patches or gum), and capital expenditures for ramps, railings, and other amenities built in a house to accommodate impairments are all tax-deductible. This covers travel to and from physicians’ offices, hospitals, and pharmacies. The standard rate for medical miles in 2021 is $0.16 per mile.

Consider Next Year’s Tax Brackets

Before grouping spending, taxpayers should evaluate their total tax rates for this year and future, according to Estill.

“For example, if I know my income will rise next year, putting me in a higher tax band, it may make sense to postpone taking the deduction until next year since it will be worth more to me as a proportion of my income,” he explains. If you are in the 12% tax rate in 2021 but may be in the 22% tax bracket in 2022, your deductions will be more valuable in 2022. A significant tax bracket shift may apply if, for example, you were jobless for a portion of 2021 owing to the economic crisis that began in 2020 but subsequently got a new job, among other possibilities.

“Similarly, if my income is likely to fall next year, it could make sense to attempt to accelerate purchases into the current tax year,” Estill says. This may happen if you know you’re going to retire next year, for example.

Beware the Alternative Minimum Tax

The typical advise to move costs from January to December in order to claim the tax deductible a year sooner might backfire if you wind up paying the alternative minimum tax (AMT).

  Tax-Free Definition

What exactly is the AMT? According to the Internal Revenue Service, “Certain tax incentives under the law may dramatically lower a taxpayer’s normal tax amount. The alternative minimum tax (AMT) limits the advantages available to taxpayers with significant economic income. It contributes to ensuring that such taxpayers pay a minimal amount of tax.”

Determining whether the AMT applies to you is difficult and may need expert tax advice. If the AMT applies to you, you’ll need to reconsider your tax-cutting approach. “If you are subject to AMT, the ability to deduct property taxes is lost. It could be better to postpone the payment till next year. Before assuming that prepayment would result in income tax savings, contact with a tax specialist “He continues.

The same is true for state income taxes paid in December rather than January for the fourth quarter of the current tax year, according to Estill.

When should I start tax planning?

Year-end tax preparation is more complicated than it seems. Rather of hurrying to minimize your taxes in December, a better option is to work with a tax expert to create an ongoing plan that you can apply throughout the year and adjust as needed if your income or spending do not match your projections.

If I file married filing separately, am I eligible for the American Opportunity Tax Credit?

When is the deadline for taking a required minimum distribution from my retirement account?

If you turn 72 in 2021, your first required minimum distribution (RMD) is due on April 1, 2022, and your second on December 31, 2022. The latter deadline of April 1 only applies to RMDs in your first year. Your RMD must be taken by December 31 of each year after that.

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