In the final weeks every year, it can pay to review your situation and plan ahead for tax season. To lower your tax bill for 2021, here are seven possibilities to consider.
1. Be aware of the standard deduction amount this year. The standard deduction increased to $12,550 (up $150) for single filers and $25,100 (up $300) for married filing jointly. Itemized deductions are only useful if they exceed these amounts.
2. Contribute to your health savings account. If you’re in a high-deductible health plan, you might qualify for a health savings account. Your contributions are pre-tax, which reduces your taxable income. Annual contribution amounts are higher for the 2021 tax year. The contribution deadline is April 15, 2022.
- $3,600 individual coverage (up $50)
- $7,200 family coverage (up $100)
- Individuals ages 55 and older can make an additional $1,000 catch-up contribution.
3. Make a cash contribution to a charity. If you take the standard deduction (instead of itemizing), a cash gift to a qualified public charity (cash, check or credit card) can help reduce your taxable income in 2021.
- Married couples filing jointly can deduct $600 total, double the amount allowed in 2020.
- Single filers can deduct up to $300 (no change).
Not eligible: Contributions to donor-advised funds and certain private foundations as well as non-cash contributions.
4. Make a qualified charitable distribution. If you are 70.5 years or older and would like to support a charity, consider making a qualified charitable distribution (QCD) up to $100,000 directly from an IRA to a qualified charity. A QCD helps reduce your adjusted gross income (AGI) and taxable income for the 2021 tax year. It works whether you take the standard deduction or itemize deductions, and it can count toward your required minimum distribution, if you have one.
5. Contribute to an IRA. Consider contributing to your traditional or Roth IRA — you can do so in a lump sum if you’d like — by the April 15, 2022, deadline. The maximum total annual contribution across all IRAs for 2021 is $6,000, or $7,000 if you are 50 or older.
- Traditional IRA: Contributions may be tax deductible, depending on your income level and whether you are covered by a retirement plan at work.
- Roth IRA: Depending on your income level, you may be eligible to contribute to a Roth. Roth IRAs are funded with after-tax dollars, but distributions are tax free in retirement if certain conditions are met.
6. Consider tax-loss harvesting. Stock valuations have been high throughout most of 2021. If you have a losing stock in your portfolio, tax-loss harvesting may help lower your tax bill and maintain a diversified portfolio. It’s critical to work with your financial advisor, who might recommend selling it and then immediately reinvesting in an asset that offers a similar risk/return profile as what you sold. Buying the same security immediately after taking the loss can result in losing part, or all, of the loss because of the wash sale rule.
7. Deduct medical expenses. If you itemize your tax deductions, you may be able to deduct eligible unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). There is a wide range of deductible medical expenses — talk to a tax professional or visit the IRS website for details.
We can help with year-end planning
The final weeks of the year are a great time to meet with your Ameriprise financial advisor and tax professional. They can review and discuss how you may be able to take advantage of these and other tax-saving opportunities.