A tax bill that comes out of the blue can ruin anyone's day. Here are 5 easy things that you can do to lower your tax bills and avoid that unpleasant surprise. To use these strategies, you often have to itemize instead of taking the standard deduction, but the extra work may be worth it depending on your circumstances.
1. Tweak your W-4
The W-4 is a form you fill out and give to your employer to tell them how much tax to take out of each paycheck.
If you got a big tax bill this year and don't want to be surprised again next year, increase your tax your withholdings so that you owe fewer taxes when it's time to file your tax return.
If you got a big tax refund last year, you can now do the opposite and fill form W-4 to lower your tax withholdings. If you don't, you might spend the whole year living on less money than you need to!
You can always change your W-4.
2. Put money in your 401 (k) Plan
When you have less taxable income, you pay less tax, and 401(k)s are a popular way to do this. When you put money straight from your paycheck into a 401(k), the IRS doesn't tax it.
You could have put up to $19,500 per year into an account for 2021. In 2022 you can put up to $20,500. That means $20,500 tax free! And if you're 59 years or older, you can put in an extra $6,500 in 2021 and 2022.
Most employers pay for these retirement accounts, but people who work for themselves, such as self-employed, business can open their own 401(k)s. And if your employer matches some or all of what you put in, you'll end up with free money.
3. Put money into an IRA
Individual retirement accounts come in two main types: Roth IRAs and traditional IRAs.
You might be able to deduct money you put into a traditional IRA, but how much you can deduct depends on how much you make and whether or not you or your spouse has a retirement plan at work.
For the 2021 tax year, you may not be able to deduct your contributions if you are covered by a retirement plan at work, you are married and filing jointly, and your modified adjusted gross income was $125,000 or more. This number goes up to $129,000 in 2022.
You can only put a certain amount of money in an IRA:
In 2021 and 2022, the most you can get is $6,000 per year, or $7,000 if you are 50 or older.
You have until the deadline for filing your taxes to put money into your IRA for the previous tax year. This gives you more time to use this strategy. (What it does.)
4. Choose the right time
From a tax point of view, there is something that tax legal professionals call tax planning season. Usually the first half of the year is tax filing season, and the last half of the year is tax planning season. This refers to the months of the year that you should (or could) use to prepare for a successful tax filing when the time comes, and guarantee that you'll be able to cut down your tax bill by having all your expenses, deductions, and credits ready to be claimed on your tax return!
Furthermore, another legal tax trick is to get ahead of the game by processing tax-deductible payments on December 31st. as opposed to January 1st. (which would count as the next tax year). In terms of expenses, if you know that a future expense will be tax-deductible, you might want to pay for it this year instead of next. For example, if you paid your January mortgage payment in December, you could deduct an extra month's worth of interest this year. In the same way, if you know you're close to the limit for the medical expenses deduction, rescheduling that root canal to December 31 might make the pain easier to handle if the cost suddenly becomes deductible during this tax year, too!
5. Don't keep it!
Donations to charity are tax-deductible, and they don't even have to be cash. If you gave clothes, food, old sports equipment, or household items to a registered charity and got a receipt, those things can help lower your tax bill.
For the tax year 2021, you may be able to deduct $300 per person (or up to $600 if you are married and filing jointly) without having to itemize.
Many tax software programs have modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill and save on your taxes by doing a good deed.
With your tax and business planning, the strategies are not a once size fits all, on the very contrary, each case varies greatly, and specific personal, business and financial circumstances must be taken into consideration before implementing the strategies that will produce the results sought, especially if the strategy includes relocation to a new jurisdiction. To get a specific strategy that will work for you and your business, make sure to schedule a consultation.