It’s almost April 15th, which normally means that your taxes are just about due. However, the federal government gave everyone an extension this year. You don’t have to file your taxes until May 17, 2021. Nevertheless, it’s one of those things that might just be better to get out of the way. Before you do, make sure you know about the ways to reduce your taxes.
Obviously, you’ll be filing your taxes for 2020. Therefore, most of the things that you could do to reduce what you owe had to be completed by now. However, there are a few things that you can do in the year that you file to still reduce what you owe.
4 Ways to Reduce Your Taxes in 2021
Yes, even though you’re filing your 2020 annual taxes, there are things you can do before May 17, 2021 to help save you money. If you are smart, you won’t file your taxes before checking out these options.
1. Max Out Your IRA Contribution
Your IRA is good for your taxes. The more you contribute to your IRA, the better your tax refund may be. If you haven’t maxed out your 2020 contribution to your IRA, then there is still time to do so. Unlike your 401(k) and other savings and investments plans, you don’t have to complete your contributions at the end of the year to count it toward taxes. You have until May 17, 2021 to contribute to offset last year’s taxes.
As long as you have the money, even in a regular savings account, it makes sense to make this contribution. It will immediately reduce your taxes, allowing you to get a bigger refund. Heck, you can use the refund to replace the savings that you used to contribute to the IRA. Moreover, you’re setting yourself up for retirement success by socking away as much money as possible in that account. It’s a win-win situation.
If you have a 401(k) plan through your work, then you’re limited in your IRA contributions. However, depending on what you earn, you may still benefit from IRA deductions. The exact amount you’re allowed varies depending on your income, so check on that before you make your IRA investment. On the other hand, if you don’t have a 401(k) through work, then you aren’t limited in this way. You can contribute up to $6000 to your IRA. If you’re over age 50, you can add another $1000 to that. All of this goes towards improving your tax refund.
Important note: If you earned very little money this year, then you might not be allowed to contribute the full $6000. You’ll get taxed on any excess over what’s allowed. Therefore, you want to look at this all very carefully. That said, if you don’t make any other tax move before you file, this is the one to make.
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2. Invest in Qualified Opportunity Zones
If you received capital gains from your investments in 2021, then you might want to offset those gains. One really smart way to do that, and one you can still do before you file your taxes, is to invest in Qualified Opportunity Zones. Specifically, you can sell an existing property, then reinvest that money into one of those Qualified Opportunity Zones. If you do, you can defer the tax on the sale. All of this is relatively new, thanks to the 2017 Tax Cuts and Jobs Act. However, after getting off to a slow start, experts say that Opportunity Zones could be poised for a big investment opportunity this year.
3. Take Advantage of Being a Small Business Owner
If you are filing as a small business owner, there are still some things you can do to lower your taxes before you file. That same Tax Cuts and Jobs Act that helps defer taxes on real estate investments as described above also includes a 20% business deduction for business owners who earned less than $315,000.
The act also has new flexible rules about depreciation deductions, which means you might be able to increase your depreciation claims now to reduce your income below that $315,000 threshold so that you can take advantage of the 20% business deduction.
Small businesses were hugely affected by COVID-19 restrictions. Therefore, there’s a good chance that you had some struggles that might make it so that you qualify for these deductions. Don’t miss out on them.
Furthermore, as a small business owner (or even a self-employed individual), you might benefit from changing how you do your business accounting. CNBC’s Andrew Osterland explains that you have two options:
- Accrual basis, which is recognizing income as you earn it
- Cash basis, which is recognizing income when you actually get paid
He goes on to explain that, “depending on the timing of income you earned and when you received it, the difference — and the taxes thereon — can be substantial.” You’ll still report the income either way, but for this year’s taxes, the way that you calculate it might make all of the difference.
Note For Those Who Worked From Home
Even if you aren’t a small business owner, you might have worked from home a lot in 2020 due to COVID-19. As a result, you may qualify to deduct your home office expenses. If you usually take the standard deduction, consider itemizing your deductions instead with this in mind.
4. Review All Credits and Deductions
Before you finish your taxes, you should make sure that you have applied to receive every credit and deduction that you qualify for. In case you are wondering, credits are direct refunds to you whereas deductions reduce the total amount of taxable income. Therefore, credits are slightly more preferable, but both are good for your bottom line. There are deductions and credits for people who are in school, parents, homeowners, and people who bought eco-friendly items.
Before you file your taxes, make sure that you’ve checked on the above ways to reduce your taxes. Then start planning right away for your 2021 taxes. After all, if you want to make the most of your money, you can’t rely on these last-minute tax tips alone. You also have to maximize charitable contributions and other things that you can only do before the end of the year if you want them to count on taxes.
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