The end of the year is such a fun time as we begin to celebrate the year we’ve had while looking forward to the new one coming. No one loves a new year the way an accountant does though!! It’s tax time, and we bet you’re looking for tips on trimming your incoming tax bill.
Whether you’re a business owner or an employee, you have the ability to affect your 2021 tax bill starting with some simple strategies. Some must be done prior to year-end but in some cases, you’ll have until April 15, 2022.
It’s not the most well-known fact so we wanted to shed some light on it while you still have time to act!
What Should You Look For?
(This chart includes the tax brackets that will be effective for the 2021 tax year.)
When looking at the chart above, where does your income fall? Are you smack dab in the middle or can you move into a lower tax bracket?
Tax Deductions (like the ones we’ll be talking about here) adjust your income to move you to lower tax brackets thus reducing the percentage of your income that you have to pay to Uncle Sam.
Making an impact at the end of the year could feel like an impossible feat, but there are a few tricks up our sleeves meant to save you time and money!
How Can You Start?
You’re able to start lowering your tax bill if your income sits on an edge and you can swing the change with contributions to retirement accounts. (We’re sure you’d rather pay your future self than good ol’ Uncle Sam!)
The best news here is that you have until April 15, 2022, to make contributions for the 2021 tax year.
In the simplest terms, if you are single and your adjusted income is $42,000 and you make a $4,000 contribution to your retirement account you would end up moving to a lower (12%) tax bracket thus saving you $4,680 on your tax bill for having paid $4,000 to yourself in the form of a retirement contribution.
Let’s take a look at the options available…
IRA Contributions
An IRA is a self-funded retirement account. Traditional IRAs make an immediate impact on your upcoming tax bill because the deductions are pre-tax.
Individuals can contribute up to $6,000 total between their traditional IRA and Roth IRA accounts. Those that are 50 years and older can make an annual catch-up contribution up to $1,000 in 2022 (no change from 2021), or $7,000 total.
401(k) Contributions
A 401(k) is a benefit if you were to work within a business, where the employer typically matches to a certain percentage and most control is out of the employees’ hands. Because it’s done through an employer, contributions are usually expected to be completed by the end of the tax year, but every company has its own policy on this so it’s best to ask.
If you are looking to make contributions to a 401(k) for the 2021 filing season, your end goal should be to contribute enough to drop your taxable income to the next bracket. Individuals are eligible to contribute up to $19,500/year to a 401(k), which offers you a large shovel out of any tax bracket.
(As a business owner, you personally will not have access to a 401(k) because 401(k)s are handled for employees by their employers.)
Both Spouses Contribute
While only one person may own an individual IRA or 401(k), it’s important to note that each person has their own individual limits that combined can make an even bigger impact on their joint return.
What’s Next?
Contributions are helpful during tax time but even more so come retirement.
Although these are one of the biggest drivers, these are not the only opportunities you have to lower your tax bill!
Reach out to us as soon as possible to find out where you can trim down for tax season NOW!