Christians know that we are “to pay unto Caesar what is Caesar’s,” but that doesn’t mean we can’t take advantage of every legal tax break. You can still take steps to minimize your 2021 tax burden.
If you haven’t maxed out contributions to your retirement accounts, do it now, even though you actually have until April to do it.
This year, individuals can make up to $19,500 in tax-deductible 401k contributions, or $26,000 if you’re 50 or older. You can also contribute up to $6,000 to a traditional or Roth IRA, or $7,000 if you’re age 50 or older.
If you don’t have a Roth IRA, this may be the time to make a Roth conversion. You’ll be converting pre-tax dollars into post-tax money, so you’ll owe income taxes on the funds you convert, but when you withdraw those funds later in retirement, you won’t owe any taxes on it.
This is an especially good strategy if your income was low in 2021. COVID did that to a lot of people. If you expect your income to increase next year, it’s better to pay the taxes now when you’re possibly in a lower bracket.
You can also deduct contributions of up to $3,600 into a health savings account if you have access to one. Also, while there’s no federal deduction for contributions to a 529 education savings plan, many states do offer tax incentives. Consider opening a 529 plan.
You may be able to lower your adjusted gross income by giving to your local church or qualified ministries. It’s more difficult to get a deduction that way since the standard deduction for an individual was raised to $12,550, or $25,100 for married couples filing jointly. However, there is a temporary provision still in place this year that allows you to take a $300 deduction ($600 for joint filers) for making an eligible gift. Make sure you take it on your 1040, but keep in mind that it has to be a cash contribution.
Don’t forget to take your Required Minimum Distributions (RMD). The IRS requires you to take a certain amount of money out of your pre-tax retirement accounts each year once you’re 72 or older. Failure to do so is costly. You’ll pay 50% in taxes on every dollar you fall short of your RMD.
If you must take an RMD, consider making a Qualified Charitable Distribution (QCD) with some or all of the money. You’ll bless your favorite ministry while satisfying your RMD, without owing taxes on that money. Check with your retirement plan manager for details on how to make a QCD.
If you have a Flexible Spending Account (FSA) at work, make sure to use all of the money you’ve contributed to it this year. In most cases, the money in your FSA is “use it or lose it.” Spend it all on qualified items before the expiration date. Check with your HR Department for more details.
2021 has been a great year for the markets, but if you happen to own stocks that didn’t do well, maybe even lost value, now’s the time to consider tax-loss harvesting. With this strategy, you sell stocks that have declined in price to realize a loss. You can then use that loss to offset capital gains made on other investments this year.
If you were extremely unfortunate this year, and actually sustained more losses than gains, you can take an additional deduction of up to $3,000 against your taxable income in 2021. If you lost more than that, you can roll over those losses into future years, up to the $3,000 annual limit each year.
Finally, make an appointment to meet with your CPA or tax advisor to make sure you haven’t missed any deductions and to plan for lowering your tax burden next year. Don’t wait until the tax season crunch. If you don’t have a tax advisor, go here to get a Certified Kingdom Advisor in your area.
Take advantage of these tips and you’ll be “paying unto Caesar” only what the law requires!
You can also listen to th e related podcast on this topic.