Year-end tax planning can only go so far. Don’t wait until December. The best tax-saving strategies take time to implement, and luckily you can start now. Consider strategies that can be helpful if you begin executing them midyear.
Here are six tax-related items you may want to put on your financial checkup checklist.
Get Your Paperwork in Order
Are the financial records you’ll use to complete your tax return in disarray? If so, take the time now to get your financial records in order. This way, you won’t be hustling at the last minute to find receipts and other documents you need to file your tax return.
Working on your taxes can be taxing. But you can make it a smoother process by instituting a year-round plan to assemble and track your financial records. Lean on technology, like cloud-based storage, to help you store your documents.
Consider Charitable Contributions
For the 2021 tax year, you can qualify for as much as a $300 tax deduction for a cash contribution if you take the standard deduction on your tax return. If you itemize your deductions, the ability to take deductions for charitable donations expands well beyond the $300-per-person allowed when taking the standard deduction.
Before the calendar flips to 2022, look at making contributions to your favorite charities so you can do good and enjoy tax benefits at the same time.
If you don’t feel like you can donate financially, consider giving your time to a cause you care about. Wings of Gratitude is one of our favorites at U.S. Money Reserve. The program lets you send uplifting messages to retired and active-duty U.S. military personnel in the form of letters, cards, notes, photos, or artwork. While this effort won’t change the numbers on your tax return, it can bring you emotional fulfillment and help you stay focused on other things that matter.
Adjust Your W-4 Withholding
To avoid an unwelcome tax surprise, consider changing the withholding amount on your employer-provided W-4. For example, when you last filed your taxes, did you get hit with a massive tax bill? If so, you might want to increase your W-4 withholding. But if you received an enormous refund last time around and would prefer to receive that money in your paycheck throughout the year, you might want to decrease your W-4 withholding.
Investigate and Plan for Tax Credits
Depending on your income level, you may be eligible for various tax credits. Tax credits lower the amount of money you owe the government. The federal government offers tax credits for college expenses, retirement savings, child care expenses, adoption, and energy-efficient home upgrades.
Maximize your tax credits by knowing what you can get a tax credit for and planning. For example, do you plan on buying a car anytime soon? Some states offer a tax credit for electric-powered vehicles. Are you saving to make home improvements? Research your appliance purchases beforehand since some equipment (including installation) is eligible for a tax credit. This includes solar hot water heaters and solar electric equipment, notes Principal Financial Services.
Check and Consider Increasing Your Retirement Contributions
It’ll be December before you know it. So rather than scrambling at the end of the year to maximize contributions to your retirement accounts, why not start now?
For 2021, employee contributions to an employer-sponsored 401(k) are capped at $19,500, with an extra $6,500 allowed for people 50 and over as a catch-up contribution.
For traditional and Roth IRAs, the combined contribution limit for 2021 is $6,000 if you’re less than 50 years old and $7,000 if you’re at least 50 years old.
Explore Alternative Assets
A midyear financial checkup lets you take time to look into portfolio alternatives. For instance, you may want to see whether a self-directed IRA makes sense for you. A self-directed IRA enables you to put money into alternative assets like gold, real estate, or even a privately held company.
Some experts recommend that portfolios have a 10 to 25% allocation to alternative assets.
A self-directed IRA gives you the chance to diversify your portfolio and not merely focus on traditional assets like stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This type of diversification can be helpful because alternative assets tend to show a low correlation with traditional assets, including stocks and bonds, the Corporate Finance Institute notes.
Get ahead of the tax-planning game with these tips. If you need help setting up or understanding self-directed IRAs or alternative assets, call U.S. Money Reserve today.