Tax season is approaching fast—and while it may be too late to take additional steps to reduce your 2020 tax liability, there are several things you can do to plan for 2021. For this blog post, we wanted to discuss a few tax management strategies that are worth considering.
Max out contributions to retirement, education, and health savings accounts
Maxing out contributions to your retirement accounts, such as your 401K and IRA accounts can reduce your adjustable gross income (AGI), which can lessen your income tax liability. The deadline to max out these types of contributions is Dec. 31. For more information about the cap on tax deductible contributions for 2021, talk to your tax professional. You can also reduce your AGI by maxing out contributions to education savings accounts, such as a 529 plan, and health savings accounts (HSAs).
Did you start a business? Make purchases
Did you know you can write off certain types of business expenses? If you need office furniture, a printer, company cars, or other types of business supplies, buy them before the end of the year. You may also be able to take a home office deduction (if you have a space in your home, such as a spare bedroom, that’s used exclusively for work.) The rules on the home office deduction can be a bit tricky, so if you have questions about what you can and can’t write off, talk to a licensed tax professional. They can also help you understand what does (and does not) qualify as a business expense.
Consider municipal bonds
When you purchase a municipal bond, you’re lending money to the government in exchange for a predetermined amount of interest. When the bond reaches its maturity date, the “loan” and the interest are repaid to the buyer. Short-term bonds tend to reach their maturity date in 1-2 years, whereas long-term bonds might not mature for a decade or more. Interest on municipal bonds is tax-exempt at the federal level, and it may be exempt from state and local taxation.
Make Changes to Your W-4
If you tend to get a large income tax refund (and you’re not interested in giving Uncle Sam an interest-free loan this year), it may be time to make some changes to your withholding. If you have questions about how (and why) to do this, ask your tax professional.
For additional tax management tips, call Hughes Snell & Co. P.A. today to schedule a free consultation.