INDIANAPOLIS — As 2021 comes to an end, many people start thinking about those New Year's resolutions or where to spend New Year's Eve. But there's one more thing many people may not be thinking of: tax planning.
Experts say December is the perfect time to review your financial goals.
"A lot of people think that taxes are due in April, but a lot of these tax changes that you can make are actually prior to the end of the year," said Casey Marx from Crown Haven Wealth Advisors.
Marx said to help lower your tax liability, contributing to charity is a great way to get a deduction.
"If you wanted to, you can contribute as much as your pay and deduct that from your taxes, so it's an extremely rewarding thing to be able to do," Marx said.
That option is for taxpayers who itemize deductions. Cash contributions must be made to a qualified charitable organization.
According to the IRS, taxpayers who claim a standard deduction can claim up to $300, or $600 per tax return for those who are married and filing jointly. Also, don't forget receipts to back contributions, regardless of the amount.
Marx said another way to decrease liability is to take a look at your retirement accounts, like traditional IRAs or 401Ks.
"They can do what's called a Roth conversion, which is where you pay taxes on those tax-deferred savings now, but then you get the benefit of having tax-free income distributions in retirement," Marx said.
Marx said to be aware that by doing this, there is an upfront tax.
"I think folks are afraid of paying the taxes now because nobody likes to pay taxes, but when you do that in a measured way, you're allowing your money to grow in a completely tax-free environment and then you're able to take those funds out — tax-free — later," Marx said.
Thirdly, if you're retired and age 72 or older, the IRS makes you take a required minimum distribution (RMD) from your retirement accounts each year.
"If you don't take that from your qualified account, from your IRA or whatever, there's a stiff penalty. It' 50% of what it should be," Marx said.
That requirement was suspended in 2020, but is reactivated for 2021.
Also, homeowners who make an extra mortgage payment on Dec. 31, may be able to claim the additional interest paid as a tax deduction in the tax year paid.
Marx said the further ahead you can plan for your tax situation, the better chance you have at reducing your tax burden.