It’s the time of year when you should be thinking about wrapping up your taxes. It is never too early to begin planning for next year if you want to maximize your tax return. This article has some great tips on avoiding overpaying in taxes and maximizing deductions so that you can get the biggest refund possible!
Taxes will always be with us.
To paraphrase an adage, “the only certainties in life are death, taxes, and difficult issues regarding tax-saving strategies.”
Many taxpayers are scrambling to figure out the best options, such as timing income, deductions, and other manipulations, in the face of massive uncertainty regarding potential tax-law changes. More information will be provided as the legislative picture is more precise.
In the meanwhile, here are some ideas and possibilities to explore:
Is it harvest time?
Following another year of high stock-market gains, many investors should explore a “quite successful” technique known as tax-loss harvesting, according to Robert S. Keebler, a certified public accountant, and partner at Keebler & Associates LLP, a tax and estate-planning company in Green Bay, Wis.
While it is more enjoyable to contemplate your investment wins, set aside time to consider your failures and consider selling them. While selling underperforming stocks and other assets at a loss may seem like a painful admission of failure, there are numerous reasons why this time-honored strategy may produce significant tax savings.
To begin, realized capital losses can usually be applied to existing gains. (“Realized” losses and gains are measured against actual assets sold, not paper profits or losses.) You may additionally deduct up to $3,000 of your net disasters each year ($1,500 if married and filing separately) from other income, such as salaries.
If your net losses are even higher, they are usually rolled over into subsequent years. (Ask your state or a tax professional about any variations in state tax rules.)
Many uncertainties remain about what, if anything, will happen in Congress about proposals to raise capital-gains taxes on high-income investors. Who will be impacted, how much, and when? These and other uncertainties about what may be in the tiny print might generate complex investment-timing issues for upper-crust taxpayers who may be caught in the crossfire. They may need to speak with tax and investment professionals depending on their facts and circumstances. Keep an eye out for more developments.
Be careful of the ‘Wash sale.’
If you use this method, be careful not to create a “wash sale” and have your loss “disallowed,” as the IRS puts it. According to IRS Publication 550, a wash sale happens when you sell or exchange stock or assets at a loss and then acquire the same or “nearly similar” securities within 30 days before or after the sale. If you make a wash sale, you cannot deduct the loss (unless it was “incurred in the usual course of your business as a stock or securities dealer.”)
Imagine you paid $1,000 for 100 shares of stock several years ago to use an IRS example. You now sell those shares for $750, a $250 loss. However, within 30 days after that sale, you purchased 100 shares of the same stock for $800, expecting a price increase. That $250 loss is not deductible. Instead, add it to the cost of the new store ($800) to get a basis of $1,050.
What is the most tax-effective way to give to charity?
Donors can benefit themselves while also benefiting others by making charitable donations in the most tax-efficient manner feasible. Most of the time, this implies gifting valued securities rather than cash.
Donors benefit from a charitable deduction for the value of the securities while avoiding taxation on the appreciation. What’s the catch? Contributing appreciated stock held for less than a year is not a good idea since the deduction for a short-term investment is equal to its cost basis, not its current value.
Donating to charity
According to Mark Luscombe, a chief federal tax analyst at Wolters Kluwer Tax & Accounting, a new break was created by legislation that went into effect last year for taxpayers who contribute to a charity and take the standard deduction rather than itemizing their deductions. According to Eric Smith, an Internal Revenue Service spokesperson, there are a few adjustments for the 2021 tax year.
Married couples filing jointly in 2021 can deduct up to $600 in charitable contributions if they do not itemize, but singles can only deduct $300. The maximum deduction for joint filers and single filers in 2020 was $300 per return.
This deduction was an “above-the-line” deduction on federal income tax forms for 2020, meaning it was recorded above the line for adjusted gross income or AGI. This resulted in a lower AGI, which has ramifications for a variety of other tax items. According to Mr. Smith, Congress “wrote the legislation somewhat differently for 2021, bringing it below the line-not decreasing AGI, but still reducing taxable income.” Line 12-b of a draft IRS Form 1040 for 2021 reveals it.
A Few Reminders
Here are a few reminders about things that haven’t changed: This rule applies to “cash” gifts, including cash, checks, and credit cards. Ensure you have all of the necessary paperwork, advises Stephen W. DeFilippis, owner of DeFilippis Financial Group, wealth management, and tax business.
Have you received your Required Minimum Distributions?
In general, investors should keep assets in retirement plans for as long as feasible. However, some have no choice: IRA owners over the age of 7012 and beneficiaries of inherited IRAs are required to take Required Minimum Distributions (RMDs) by December 31 of each year. The only exception is the first mandatory payout, which must be taken before April 1 of the following year. Those who miss the yearly deadline risk harsh penalties, including a 50% excise tax on any payout deficit.
Contributions of “non-cash” goods, such as clothes or securities, do not count, according to Mr. DeFilippis, who is also an enrolled agent, a tax professional allowed to represent taxpayers at all levels of the IRS. Donations must be made to “qualified” organizations; donor-advised funds are not eligible under this provision.
Meanwhile, a popular provision known as a qualified charitable donation, or QCD, is still in effect, according to Catherine Martin, the lead tax research analyst at H&R Block’s Tax Institute. With a QCD, investors 7012 or older can generally transfer up to $100,000 per year directly from an IRA to charity without incurring tax consequences.
This transfer from an IRA to a qualified charity counts toward the taxpayer’s required minimum payout for that year. Donations to donor-advised funds are not eligible. According to the IRS, transfers that exceed the exclusion limit are considered income. For further information, see IRS Publication 590-B.