During the last several months of the year, you have several prime opportunities to lower your taxes owed when you file taxes.
Here are some of the best things you can do to maximize tax breaks early, right at the end of the year.
Make sure that adding tax breaks won’t come back to bite you—double-check AMT thresholds
What’s an AMT threshold? The Alternative Minimum Tax (AMT) is a tax-break buster that kicks in once your income passes a certain amount. It’s designed to make sure wealthy taxpayers are still paying a minimum amount of tax, and it does so by making some typically-deductible income taxable again.
You want to check the AMT for your filing status so that you don’t max out a deduction, like retirement savings, and then end up not having those contributions be tax-free because your income was past the threshold.
The 2021 exemption amounts are:
- Single taxpayers: $73,600
- Married taxpayers filing jointly: $114,600
- Married filing separately: $57,300
- Head of Household: $73,600
These amounts aren’t exactly the same as AGI. Alternative Minimum Tax has its own definition of income, so to make sure you don’t cross the threshold, use Form 6251 to calculate AMTI (Alternative Minimum Tax Income).
Max out retirement savings
Once you know you’re in the clear with the AMT, do your best to max out your retirement contributions for the year.
This goes for tax-deferred savings accounts, of course. Whether it’s a 401(k) or IRA, you’ll only be helping yourself out for this year’s taxes if the account doesn’t tax contributions.
Accounts like Roth 401(k)s and Roth IRAs tax contributions instead of distributions—so any money you put into these wouldn’t be tax deductible.
Max contribution amounts for 2021:
- 401(k): $19,500, or $26,000 if you're age 50 or older
- All IRAs: $6,000, or $7,000 if you're age 50 or older
Max out charitable giving
Taxpayers who plan to itemize deductions should look into charitable donations—they are deductible if sent to a qualified charitable organization, and the holidays are the perfect time to make gift donations, too.
You could even look into a donor-advised fund, which is essentially a banking account for money you set aside to donate to a worthy cause. Deposits to a donor-advised fund are tax deductible.
In 2021, taxpayers can also get a charitable donation deduction up to $300 ($600 if married filing jointly) without itemizing deductions.
Use leftover FSA funds
Since flexible spending account (FSA) funds operate on a use-it-or-lose-it basis, make sure you spend your yearly amount by the end of the year (or your employers grace period).
Thanks to COVID-19 relief, you can use your FSA funds to buy over-the-counter meds like ibuprofen and acetaminophen. Stock up on other medicine-cabinet staples and more—you can browse FSA-qualified items on FSAStore.com.
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