As 2021 nears an end, you can use strategies that will greatly benefit you when you file your taxes next year. Notice that I said “benefit you,” rather than “reduce your taxes,” because the goal is to make more money after taxes. Here are a few ideas to consider, along with some caveats.
1. Support your favorite charity
Most retirees will take the standard deduction, so they won’t itemize. But for 2021 you can still claim a deduction as part of the CARES Act. That amounts to up to $600 for married people filing jointly and $300 for those of other filing statuses. Mike Piper, a CPA and author of the Oblivious Investor blog, notes that another alternative for those over age 70 1/2 is to make a direct contribution from an IRA to a charity. You won’t owe taxes on the amount you withdraw and give to charity.
2. Harvest your tax losses from investments held in a taxable account
I’m sorry for your loss, but you can make the most of it by selling and taking a tax deduction. Bonds and bond mutual funds haven’t done well this year, and you may have some losses there. You can use an unlimited amount of losses to offset taxable gains. You can usually deduct up to $3,000 in additional losses from your income and carry forward the remaining amount to future years. Wait at least 31 days to buy your losing investment back; if you don't, the IRS will disallow that loss and consider it a tax-wash sale.
3. Sell your investment winners without paying federal capital gains tax
If you’ve held your investments for more than one year, you pay a long-term capital gains tax. But the capital gains tax rate happens to be zero at or below the following taxable income:
|Filing Status||Taxable Income|
|Married, filing jointly||$80,800|
|Married, filing separately||$40,400|
|Head of household||$54,100|