Year End Tax Planning Tips | Lake Stevens Tax Service

Year-End Tax Tips and Reminders for Individual Tax Payers – 2021

Max out their IRA contributions

Contributions to an IRA are always a good idea for those who are eligible, but there may even be beneficial for tax purposes depending on the type of account. For 2021 and 2022, there is a $6,000 limit on contributions to traditional and Roth IRAs. Those age 50 or older can contribute another $1,000. Contributing to a traditional IRA may also be tax-deductible for those who qualify, which could reduce the amount owed in taxes. Contributions to Roth IRAs are never tax-deductible, and if you make too much money, contributions cannot be made.

Review/update beneficiary information

Keeping your beneficiary information up to date is crucial to ensure proper legacy planning. This is especially critical for births, marriages, divorces, and deaths. Without living beneficiaries, assets are generally transferred to the estate, and state law determines who receives the estate’s assets.

Take their required minimum distributions (RMDs)

Taxpayers who reached age 70-and-a-half before Jan. 1, 2020, are required to take distributions (RMDs) from their individual retirement accounts. For taxpayers who reach age 70-and-a-half after Dec. 31, 2019, the RMD age is 72. Special rules apply for taxpayers turning age 72 in 2021. Taxpayers should seek assistance from an experienced tax professional with questions.

Donate to a charity

Donating to a charity is a great way to help the community, but for 2021, taxpayers who are nonitemizers and make a qualifying donation can possibly claim a tax deduction of up to $300 ($600 for married individuals filing joint returns). For 2021, individual taxpayers who itemize deductions and contribute cash to a qualified charity may deduct up to 100 percent of their adjusted gross income (AGI) after considering other contributions subject to the charitable contribution limitations.

Use all their FSA cash

FSAs are a great way to reduce taxable income, but generally, any funds in the account that aren’t used by Dec. 31 each year are lost.

Make fourth quarter state estimated tax payments

For taxpayers residing in States with an income tax (CA, ID, OR, etc.) Even though the deadline is not until Jan. 15, 2022, making the state payment before Dec. 31, 2021, means it may be deducted on the 2021 federal return for those who itemize. This can be beneficial if the current $10,000 SALT deduction cap has not been met.

Gather all statements and banking information about advanced child tax credit payments

Gathering these now will help ensure proper reporting of any advance payments received in 2021, as these need to be reported in order to properly calculate the credit for the 2021 return. For 2021 only, the credit is completely refundable, which means some taxpayers who do not usually receive a refund may this year. Alternatively, if taxpayers were issued advance payments in excess of what they are eligible for, they may have to pay it back.
Taxpayers should also review and update any financial information (increased or decreased income) in the IRS’s Child Tax Credit Update Portal.

In January 2022, the IRS will send taxpayers Letter 6419 with the total amount of advance child tax credit payments disbursed in 2021. Keep this letter with your tax records, as taxpayers may need to refer to this letter when filing their 2021 tax return.

Get Expert Tax Advice

There’s a lot to think about when it comes to tax planning. That’s why it often makes sense to talk to a tax professional who can evaluate your situation and help you determine if any year-end moves make sense for you.

Contact Lake Stevens Tax Service or call us at (425) 334-8138 with any questions about these important tax tips that you can use now to save money!