It’s Not Too late to Lower Your 2021 Tax Bill
Think you’ve missed your opportunity to lower your taxes and save on your 2021 tax bill? Think again. The following tips can help reduce your tax liability if implemented prior to the tax filing deadline.
Tip #1 – File and pay on time.
If you file and pay your taxes late, the IRS will charge you a late-filing penalty of 4.5% per month as well as a 0.5% monthly late payment penalty on any taxes owed. If you are unable to complete your filing on time, be sure to file Form 4868 and the equivalent state form to request an extension.
Tip #2 – Maximize your home office deduction.
For those of you not working as employees, if you work from home and have a designated home office space that’s used exclusively for business, you may be eligible to write off certain expenses. To be eligible, expenses must be based on the proportion of your home that is designated exclusively for work. Eligible expenses may include a portion of your rent or mortgage, real estate taxes, utilities, etc.
Tip #3 – Contribute to your health savings account (HSA).
2021 HSA contributions can be made until the tax filing deadline. There are three main tax advantages of saving in an HSA:
- Contributions reduce your taxable income because they are made with pre-tax dollars.
- HSA contributions grow tax free in the account.
- Withdrawals from the account are tax free when used to pay for qualified medical expenses.
Tip #4 – Make additional contributions to your retirement accounts.
Similar to HSA contributions, you have until the tax filing deadline to make 2021 contributions to traditional and SEP IRAs. Not only can these tax-deductible retirement plan contributions help lower your current year’s tax liability, they also grow tax deferred within the account.
Tip #5 – Itemize your deductions.
As a general rule of thumb, it normally makes sense to itemize deductions on your tax return if the sum of your qualified expenses is greater than $12,550 (individual filers) or $25,100 (married couples filing jointly). You may be more likely to fall into this category if you own your home and/or made significant charitable donations.
If you choose to itemize and are able to deduct medical expenses, don’t forget dental and vision care expenses or expenses related to COVID-19, such as at-home test kits and personal protective equipment.
At Creative Planning, we specialize in helping clients implement custom tax planning strategies to reduce their tax liabilities. If you’d like help preparing to file your taxes, or with any other financial matter, please schedule a call with a member of our team.