It’s not too late to boost your tax refund or reduce your bill for 2021, according to financial experts.
“There are quite a few tax moves that taxpayers should consider at year-end,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.
But the deadline for many of these strategies is Dec. 31, leaving only a few days for last-minute maneuvers.
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Harvesting tax losses or gains
Filers may consider tax-loss harvesting, which allows them to offset capital gains with losses. Investors with more losing assets than winners may even deduct up to $3,000 against their regular income.
“If you are facing an unusually high-income year or had tremendous losses, this might be a good strategy,” said Ashton Lawrence, a CFP with Goldfinch Wealth Management in Greenville, South Carolina.
However, those hoping to offload and repurchase the same assets need to be aware of the so-called wash-sale rules, which prevent someone from deducting a loss if they repurchase “substantially identical” investments within 30 days.
And investors below certain taxable income thresholds may avoid capital gains levies on profitable assets held for more than one year.
Then, they may repurchase the same investment for a so-called stepped-up basis, adjusting the purchase price to the current value for lower future taxes.
Donate to charity
Philanthropic investors may also consider a year-end charitable gift, with the most profitable assets held for more than one year, such as stocks or cryptocurrency, offering the biggest tax break.
With a $12,550 standard deduction for single filers ($25,100 for couples filing together) in 2021, it’s tougher to itemize and claim the write-off.
But many combine multiple years of donations, known as “bunching,” to clear the standard deduction thresholds.
However, for 2021, single filers may claim a tax break for up to $300 in cash gifts ($600 for joint returns), even if they don’t itemize deductions.
Retirees age 70 1/2 and older may consider a so-called qualified charitable distribution, a direct payment from pretax individual retirement accounts, which doesn’t count as taxable income.
Someone age 72 and older may use it to satisfy their annual required minimum distribution.
“The qualified charitable distribution is a valuable gifting strategy if you want to give to charity in a tax-efficient manner,” Lawrence said.
Pay for medical expenses
If you plan to itemize deductions and spent significant amounts on medical expenses in 2021, it may make sense to pay off health-care bills before year-end to claim a larger write-off.
In 2021, filers may claim the medical expense deduction if eligible costs — such as doctor’s fees, hospital visits, prescription drugs and more — exceed 7.5% of adjusted gross income.
“Qualifying expenses charged to a credit card on or before Dec. 31, 2021, will be reported on your 2021 tax return,” Harris said.
Defer income into 2022
Those expecting to make less in 2022 may consider deferring income, such as year-end bonuses or other payments into January.
“Beware, as your taxes could be higher in 2022 than 2021,” said Patrick Amey, a CFP and advisor at Financial Advisory Service, Inc. in Overland Park, Kansas. “But it would delay payment of taxes on income for a whole year.”