Tax Day is fast approaching. Yes, we get a little reprieve this year with the filing deadline pushed back to April 18th. Can you still lower last year’s tax bill? Fortunately, we still have time to take a couple of steps before filing that could lower last year’s tax bill. It’s also not too early to think about next year.
When it comes to taxes, I like to think we should pay no more than our fair share.
Most tax planning takes place before the year ends (see here and here for some examples). But you can still take some steps to reduce your 2021 tax bill.
On Tuesday, April 5th at 12:30, I will be hosting a Zoom webinar where I will discuss these ideas in greater detail. Please keep an eye out for registration information. You can also email me if you would like to attend. I’ll make sure to register you.
1. Fund your retirement accounts.
You have until April 18th this year to fund your IRA, your Roth IRA, or your Health Savings Account (HSA). As long as you don’t exceed the income limits, you have until filing day to fund your 2021 tax-deferred retirement accounts.
As I’ve written before, HSAs provide a triple tax benefit. If you participate in a high deductible healthcare plan, you should fund your HSA and treat it as a retirement account. For HSAs remember that if you and your spouse are both over 55 and you contribute through one spouse’s plan, you should open an account for the other spouse. Why? You can only contribute the extra $1,000 for one spouse through the workplace account.
2. If you have self-employment income, consider opening (or funding) a tax-deferred account.
I often talk to prospects who have some type of self-employment income. They want to know what they can do to reduce their tax burden. Very few realize that self-employed individuals can open a self-401(k) or a SEP-IRA. The amount you can contribute has some limitations, but you can save some of your earnings in a tax-efficient way in such accounts.
Unlike contributions to an IRA or a Roth IRA, you may have more time to open and contribute to these accounts, too. The annual deadline to open and fund a SEP IRA is the due date of the company’s income tax return. The deadline to open and fund an account for 2021 is when you file the business’s tax returns in 2022. In other words, if you extend your return, you have more time to contribute.
3. Make a spousal IRA contribution.
Non-working spouses often fall behind in their retirement savings because they don’t work. If your spouse stays home and takes care of the kids, they may still be eligible to contribute to an IRA. If your modified adjusted gross income (MAGI) falls below the thresholds detailed in the first item, you can make a spousal IRA or Roth IRA contribution.
4. Consider a Roth conversion.
Technically, this will impact your tax bill in 2022 rather than 2021. But it’s still worth mentioning here. The market hasn’t been friendly so far this year. Some growth stocks, in particular, are down 50% or more. A down market makes Roth conversions more attractive.
Consider this example. You have 100 shares of XYZ stock in your IRA. The stock has fallen from $200 to $100 per share. You still like the stock and have no plans to sell. If you transfer those shares to your Roth IRA today, you will pay tax on a $10,000 Roth conversion. If the stock recovers, you won’t have to pay tax on gains you realize as the stock climbs back to $200. You won’t have to pay tax on any additional gains either. If you keep the shares in your IRA, you will pay taxes on these gains when you withdraw the money from your IRA after you retire.
5. If you have an HSA, treat it as a retirement account.
Unlike flexible spending accounts (FSAs), HSAs are not use-it or lose-it accounts. If possible, deposit money in your HSA and leave it there for retirement. Even better you can invest the money in your HSA. If your HSA funds are in an account provided by your employer, you can transfer them to another account. In contrast to 401(k) plans, you have considerable flexibility to move the money in your HSA to another provider. That way you can invest the money, which gives it the potential to grow.
6. Should you fund an IRA/401(k) or a Roth IRA/Roth 401(k)?
Many clients and prospects ask this question. The answer depends on your personal circumstances. How much do you earn currently? How much do you have in your retirement accounts? What’s your top tax rate today? What might it be in the future? You should consider all these factors when considering this question.
7. Clean out your closets.
It’s hard to find someone who doesn’t want to lower their tax bill. If you itemize deductions, you can claim a tax benefit for items you donate to charity. Be sure you make an itemized list. You want to get a receipt, too. You will have to estimate the value of the items you give away. Tax software can help with that.
This represents one of my favorite tax deductions. We help others. It’s better for the environment, as we recycle goods rather than put them in a landfill. And if we write a check, it still costs us money. For example, if your top tax rate is 24%, you save $0.24 for each dollar you donate. The other $0.76 represents a cash cost. When you donate items, you don’t spend anything more and you get a deduction for the value of the items you give away.
Closing Thoughts
It’s rare to come across someone who doesn’t want to lower their tax bill. Most of the time, we need to take the appropriate steps before the year runs out. But there are a few things we can do after the year ends that can lower last year’s tax bill. You still have time to benefit from the first three suggestions above. While the others may not lower your 2021 tax bill, they are timely steps you can take to lower your bill in 2022 and beyond.
Please join me on April 5th when I will discuss the above ideas in more detail in a Zoom webinar. I will send out the registration information soon. Please email me if you want me to make sure you’re registered.
I’ll be back next week with “Apprise’s Five Favorite Reads of the Week.”
Our practice continues to benefit from referrals from our clients and friends. Thank you for your trust and confidence.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.
