We’re a long way from the 2021 tax filing season on April 15 of next year. But if you want to lower your tax bill, there are steps you can take now in my opinion.
Max Out Your 401(k)
Let’s start with the low-hanging fruit. Some of the best tax shields are easy and accessible.
If you have a 401(k) plan at work, in my view the easiest way to knock down your tax bill is to ensure you put the entire $19,500 in salary deferral (or $26,000 if you’re 50 or older). And that’s per person.
If your spouse also works and has access to a 401(k), they can max out theirs as well. You have to make 401(k) contributions before the end of the year. (IRAs are a different animal — you can fund them up to the tax filing deadline in the following year.)
We have two months before the end of the year. So, if you’re behind on your 401(k) contributions, you might need to get creative.
Say you have some cash savings you could live on for a couple of months.
Well, you could take your salary to zero, putting 100% of your paycheck into your 401(k) for the next several paychecks.
Depending on how far behind you are, that may or may not be enough to max you out. But it will move the needle.
Dump Your Losers
With the market on fire for the past couple of years, you might not have a lot of stocks in the red. If you do, in my opinion dumping losing stock positions before the end of the year can create capital losses that will lower your tax bill.
This isn’t a massive deduction, as you’re limited to claiming $3,000 in net losses. Any losses over $3,000 simply get pushed into the next tax year.
But, hey, every little bit helps. And if you can drop a couple of duds from your portfolio that aren’t likely to recover, you might as well get benefits from them.
Clean Out Your Closet
What if money is tight now, dumping more into a 401(k) won’t work and you’re such an excellent stock picker that you don’t have any losers to dump?
Well, consider doing a little spring cleaning this fall instead. If you’re like most Americans, you have closets full of clothes you no longer wear. They may not even fit at this point.
And beyond clothes, you might have kitchen appliances, office equipment, sports equipment and a host of other things cluttering up your house that you no longer want or need. Donate them.
Depending on how big of a pack rat you are, you may have thousands of dollars in potential write-offs in items you can donate to charity.
You already spent money on it. You might as well make lemonade out of lemons by getting a tax break when you dump it. Just be sure you do it before the end of the year, and keep detailed records.
This post first appeared on November 2 on the Money & Markets blog.
Photo Credit: 401(k) 2012 via Flickr Creative Commons
This article is not intended as tax advice and is provided for educational and information purposes. Interactive Advisors does not provide tax advice. All references to tax matters or information provided here are for illustrative purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties. Investors seeking tax advice should consult an independent tax advisor.