THIS IS THE TIME to Maximize your Tax Deductions
This tax year, 2021, is almost over. Many of you probably think there is nothing more you can do to increase your tax refund. Well, that is not true at all. You can still maximize your 2021 tax deductions between now and the end of the year. This is the time to start doing this because we are only two months away from the end of the year. Remember, even though the 2021 tax season opens between January 15 and early February 2022, tax strategies for 2021 taxes must be implemented in 2021. That is why there is a tax year and a tax season.
Knowing the difference between a tax year and a tax season helps you understand how and when to implement tax strategies. The tax year is your typical calendar year that runs from January to December each year. It is a period in which the IRS taxes you for income received. Also, it is the same period you can implement tax strategies that you use to claim deductions and tax credits for the corresponding tax season. A tax season of each tax year takes place during the first quarter of the following year. For example, for the tax year 2021, the tax season will start in the first quarter of 2022. A tax season is a period during which taxpayers can begin filing their tax returns and be expected to complete payment of all taxes owed from the previous year – on or before the last day of the tax season.
Nevertheless, this article is not about the tax season. It is all about reminding you that this tax year is running to an end. Just because the tax year is running to an end, it also means that time is running out for you to implement all tax strategies and increase your tax refund, come next year.
How to maximize tax deductions in 2021?
Depending on your filing status, you can implement many tax strategies to maximize deductions before year-end. Here are three strategies we think can help you maximize deductions quickly in these final two months of the year.
1. Re-visit your expenses
Doing this is important so that you re-categorize your expenses. By doing this, you identify all IRS-approved expenses that can be itemized. In your list of expenses, identify those such as medical and dental, interest on a mortgage, charitable contributions, moving expenses, among others. Once you have them, increase your spending on them before the end of the year. However, always remember to keep paperwork to back up your expenses. The more you itemize deductions, the more the IRS scrutinizes your return.
2. Max your retirement accounts
You can contribute to an Individual Retirement Account (IRA) or a 401(k) retirement plan. Both will result in deductions. But, even though a traditional IRA gets you a deduction, how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and the income you make. In 2021, you can contribute up to $19,500 into your 401(k), and if you are 50 or older, you can contribute up to $26,000. If you haven’t reached those figures, this is the time to max it out to increase your deductions.
3. Contribute to a Health Savings Account (HAS)
Yes, setting aside money to pay for your own emergency health services earns you tax deductions. In 2021, an individual can contribute up to $3,600, and a family coverage limit is $7,200. Those aged 55 and older can contribute an extra $1,000. The withdrawals for these contributions are also tax-free – but you must use them for qualified medical expenses. Again, if you have not contributed to a HAS in 2021, do it now and take advantage of the maximum limit for your taxpayer profile.
People have also asked the following
- How can I reduce my taxable income fast?
As the year runs out, you want quick and easy tax strategies to reduce your taxable income. These quick ways must also result in less paperwork. One such way is to increase your charitable donations and max retirement accounts.
- What is the maximum amount of deductions I can claim?
A standard deduction is a single, flat figure that taxpayers can deduct according to their filing status. For example, in 2021, a single filer can deduct $12,550 from their taxable income. But there is no limit to the amount of deductions you can claim if you choose to itemize. It will all depend on how many expenses you can itemize. Of course, these should be real expenses you incurred – and they should qualify as itemized deductions, for example, medical expenses,
- Is it better to claim 1 or 0 on your taxes?
When filing your Form W-4 after getting a job, you can either choose to put “1” or “0” on line 5. By putting “0”, you are choosing to have more taxes taken out from your salary, and by putting down “1”, you are choosing less taxes to be taken from your paycheck each payday. All these choices matter. It is recommended to speak to a tax professional before deciding on a route to take. But generally, if you choose 1 (pay less taxes each pay period), you run the risk of owing taxes when the tax season opens. Therefore, it is better to choose “0” and have maximum taxes deducted from your salary.
- What decreases your amount of taxable income?
Itemizing deductions decreases your taxable income more than the standard deduction. However, this depends on whether your itemized deductions are worth more than the standard deduction.
- What are three itemized deductions?
Three examples of itemized deductions are mortgage interest, charitable contributions, and medical and dental expenses.
