Tax Season Is Here: How to Reduce Your Tax Bill for 2021
Your first set of tax documents has probably hit your mailbox, and you may be wondering how the election of a new president will impact your taxes. While that may eventually be a consideration in your tax prep, right now, it’s too early to tell.
At the moment, you should worry about the things you can control — and there are plenty of them. Here are four things you can do immediately to lighten your tax burden for 2021.
1. Selling in a Winning Position
Yes, you read that correctly. While it may sound odd to recommend selling when your taxable brokerage account looks good, it can actually benefit you in the long run. Your taxes and capital gains are calculated based on the difference between how much you paid for the asset and how much it has appreciated when you sell it.
The higher that capital gain, the higher your tax will be. If, instead, you sell off and then repurchase it, albeit at a greater cost, your cost basis will default to that higher level, too. Your taxes will be much lower on the appreciation when you start from this higher point.
2. Get Rid of Investments That Aren’t Winners
Now this probably seems more intuitive. The strategy, often referred to as tax-loss harvesting, is deployed by selling off your holdings in a taxable brokerage account whose values have dropped.
Those losses will balance out your capital gains from appreciated positions. When you have losses that outweigh the gains, you can use up to $3,000 each year to offset your income. Make sure that once you’re done, you meet with your advisor to rebalance your portfolio.
You should also educate yourself on the wash-sale rule to ensure that none of your moves violate the law.
3. Give Generously and Enjoy the Rewards
During the 2020 pandemic, the CARES Act enacted cash incentives to encourage charitable donations. While we don’t know yet what 2021 will look like in terms of the pandemic and charitable giving, the incentive could be revived. Keep an eye on the news and talk to a tax or investment advisor if you aren’t certain about what changes mean.
4. Turn Your Retirement Account Into a Roth IRA
There’s a reason why Roth accounts are so popular for retirement. They include notable tax advantages because they grow tax-free, and during retirement you don’t pay taxes on them, either. If you’ve taken an income hit during the pandemic, like so many people, then converting soon may be in your best interest.
You still have to pay taxes on traditional IRA sums you convert, but values of the fund may decrease because of the current economic conditions. You can get the funds to pay those taxes now and not have to worry about it in the future, when the account is a little bigger thanks to the economic recovery.
Now that you’ve minimized your tax bill, it’s time to think about maximizing your retirement. Let the professionals at Go Comprehensive assist you with your needs to set you up for some truly golden retirement years. Contact Jay today.