With less than 40 days until Christmas and the new year, the last thing you may want to think about is taxes! However, planning ahead, before year end, may help you to lower your tax bill come April.
Here are a few end of year tax strategies to review in order to potentially minimize your tax burden:
1. Take your RMDs from your traditional retirement accounts (Age 72 and older): * Note: The CARES act temporarily waives required minimum distributions (RMDs) for all types of retirement plans (including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans) for calendar year 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020. In future years, if you have a traditional IRA, take your RMD by December 31st. If you turn 72 that year, you must take your first withdrawal on or before April 1 the following year to avoid penalty. If you don't need the cash flow and would prefer not to increase your taxable income, you may want to consider a Qualified Charitable Distribution (QCD), directly from your qualified account to a public charity of your choice. * Note: The maximum annual amount that can qualify for a QCD is $100,000.
2. Flexible Spending Accounts (FSA): Be sure to spend any leftover funds in your flexible spending accounts. A FSA is an arrangement through your employer that lets you pay for many out-of-pocket medical expenses with tax-free dollars. Allowed expenses include insurance copayments and deductibles, qualified prescription drugs, insulin, and medical devices. *Note : You will pay taxes on any funds still in the account on December 31st. Also, you will lose access to the money unless your employer allows a certain amount in rollover for the next calendar year. Time to stock up on eye glasses, contact lenses, etc...!
3. Taxpayers need to check their withholding on their paychecks: The IRS has seen an increasing number of taxpayers subject to estimated tax penalties, which apply when someone underpays their taxes. According to the IRS.gov website the number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2017, an increase of nearly 40 percent. You can use the withholding calculator on the IRS.gov website to double check you've withheld enough to pay what is owed at tax time. If you have been withholding too much, file a new W-4 and increase your number of allowances.
4. Max out your retirement account contributions: Maxing out a retirement account contribution means that you've contributed or deposited the maximum amount that's allowed to an IRA or a defined contribution plan, such as a 401K. These tax-advantaged retirement accounts are funded with pre-tax dollars. Any contributions you make to these types of accounts lowers your taxable income. If you're under the age of 50, the maximum amount that you can contribute is $19,500—for both 2020 and 2021. If you are 50 or older, your maximum, annual limit for total 401(k) contributions is $26,000. For 2020/2021, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than: $6,000 ($7,000 if you're age 50 or older). If you have a Health Savings Account (HSA), the maximum contribution amount currently is $3,550 for individuals, $7,100 for families, and an additional $1,000 for individuals aged 55 and older.
These are just a few helpful tips to get your preparation started. With a little planning and organizing before year end, you can put yourself in a great position as the upcoming tax season approaches.