There is plenty of speculation regarding changes that may occur on the tax front for the 2021 filing year as a result of the new Biden Administration. Even if major tax changes are on the horizon, it will still take time for anything to be passed in Congress. However, that doesn’t mean you can’t be doing things now to plan for your 2021 taxes*.
A few things to consider as we enter the new year:
- If it looks like you may owe taxes for 2020, and most of your income comes from your salary, you may not be withholding enough from your paychecks. Now is the time to fix that problem so as to avoid yet another large tax bill for 2021. By updating your W-4 tax form and the amount that is regularly deducted from your paycheck, you can make sure that you won’t owe more when the 2021 tax due date rolls around, assuming your paycheck is where most of your income comes from. In fact, the IRS even has a Tax Withholding Estimator tool that can help you determine the appropriate amount that should be withheld. While nobody wants to see more money deducted from their paychecks, for many it is better than being surprised by an unexpected tax bill every year.
- Although it is too late to make additional charitable donations for 2020, you still have the potential to lower your 2020 tax bill by maximizing your contributions to an Individual Retirement Account (IRA) up until April 15. For both the 2020 and 2021 tax years, the Internal Revenue Service allows maximum individual contributions to IRAs of $6,000, increasing to $7,000 for anyone age 50 or older. Contributions to traditional IRAs are pre-tax, which will lower your overall income for the year and, consequently, your tax bill. Contributions to Roth IRAs on the other hand, while still a wise move for retirement savings, will not lower your overall 2020 income since those contributions are from after-tax income.
- The start of a new year is also the perfect time to review your overall tax situation and how it may be impacted by any major changes in your life that have taken place over the past year, such as marriage, divorce or the birth of a child. Make sure you review all of your holdings, from retirement plans, such as IRAs and 401k plans, to insurance policies, to ensure there aren’t any changes necessary to the beneficiaries you have listed. If you have experienced such changes, or if your situation is a bit more complicated and involves things like income from rental properties, family partnerships or overseas investments, it may be worth consulting a tax professional to make sure you aren’t overlooking anything that could improve your tax situation —or that could prove an unpleasant surprise.
*Please consult your tax advisor