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The pandemic year brought uncertainties and unprecedented challenges for individuals and businesses. As it draws to a close, you need to do a little more with the year-end tax planning. The objective will be the same as always, to cut down the obligations to the minimum, but you will probably want to invest extra effort to save this year. Here are some smart measures you can rely on for staying a step ahead of tax planning for 2021.
Move income into the current year
Tax rates and deductibility are likely to change in the New Year as the administration brings fresh reforms. It makes sense to move your income forward to 2020 instead of keeping it for 2021 because the rates are expected to increase in 2021. By doing so, you will get the advantage of the current lower rates and see a significant cut in the tax bill. Similarly, you can consider deferring charitable contributions into 2021 because it can also save up on the bill.
Gift generously this holiday season
Right now, you have great estate-planning and tax opportunities as the current interest rates are low, and there are lifetime gift and estate tax exemptions to avail. However, these exemptions are going to expire soon, so you should grab the window of opportunity with proper year-end planning. Gift generously as couples are allowed to give up to an astonishing $30,000 in a tax-free gift this season.
Claim business deductions for your side gig
The COVID-19 downturn forced many professionals to take up side gigs for earning extra dollars. While they may have kept you afloat, you will have to plan for reducing your taxable income now. Tax specialists at creativetax.io suggest that you should go the extra mile to identify and claim business deductions for the side gig. Thankfully, several expenses make necessary and ordinary deductions for this purpose. These include home-office deduction, expenses for the equipment and materials and write-offs for mileage.
Save with a Roth IRA conversion
Consider converting your traditional retirement account to a Roth IRA this year to save up your tax dollars. Roth IRAs make a great option for retirees because the money you save in this account grows tax-free, so you end up without a burden when you draw it on retirement. Conversely, you will have to pay ordinary income taxes on withdrawing funds from a traditional IRA or 401(k).
Go the extra mile with savings
As uncertainties still loom large, the best approach would be to focus on savings even as you look for ways to save on your tax bills for the year. If you have extra cash, direct it into your health savings account right away. You will end up getting a tax-deductible while securing money for future medical expenses. The best part is that you have plenty of time to make HSA contributions for 2020, as you can do it until April 15, 2021.
Right now, examining your current and future tax obligations should be the top priority so that you can file for 2020 and plan for 2021 well in time. Proper planning is worthwhile as it prevents errors, saves dollars, and keeps you stress-free in the New Year.
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