If you like to plan for the future and think ahead, there are certain actions that you can begin taking right now to prepare for your 2021 tax return.
Life events. Consider the implications of expected life-changing events in the coming year. For instance, if you are planning on getting married or having a child in 2021, you should make the necessary adjustments to your withholdings.
Maximize your retirement account deferrals. Contribute as much as possible to your employer’s retirement plan up to the allowed limits. If you are 50 or older by the end of 2021, your plan may allow you to make additional (catch-up) contributions. By doing so you can reduce your taxable income. In addition, you may qualify for the retirement savings contributions credit which could reduce your federal tax liability.
If available, maximize your flexible spending account contributions. There are new rules for 2021 that will allow you to roll over any unused balance, so it is no longer a use it or lose it proposition.
Maximize contributions to and distributions from Section 529 Education Savings Plans. Vermont allows a 10 percent tax credit on up to $2,500 contributed to a beneficiary’s 529 plan. For a married couple the credit is maxed at $5,000 in contributions or a $500 credit per beneficiary.
Tax savvy charitable giving. With the much higher threshold for the standard deduction, it may make sense to bunch your charitable contributions for a two-year timeframe all in one year. Alternatively, you may want to look at other options such as qualified charitable distributions from your required minimum IRA distributions if you have them or through the use of a Donor-Advised Fund (DAF).
For more Tax Return Considerations, click here.
Davis & Hodgdon Associates CPAs has been assisting individuals and businesses throughout Vermont and New England for more than 30 years so please reach out to us in Williston (802-536-1831) or Rutland (802.775.7132) to talk with a tax professional today. You can also email us at [email protected].