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Tax loss or gain
Filers may consider tax loss gains, which allows them to offset capital gains with losses. Investors who lose more assets than winners can even deduct up to $3,000 from their fixed income.
Ashton Lawrence, a CFP analyst at Goldfinch Wealth Management in Greenville, South Carolina, said: “If you are facing an unusually high income year or suffer huge losses, this may be a good strategy.”
However, those who wish to sell and repurchase the same assets need to understand the so-called wash-sale rules, which prevent someone from deducting losses when repurchasing “essentially the same” investment within 30 days.
Investors below certain taxable entry thresholds can avoid levying capital gains taxes on profitable assets held for more than one year.
Then, they may repurchase the same investment on a so-called “tiered basis”, adjusting the purchase price to the current value to reduce future taxes.
Donate to charity
Charity investors can also consider year-end charity gifts, holding the most profitable assets for more than a year, such as stocks or cryptocurrencies, to provide the greatest tax relief.
The standard deduction for single filers in 2021 is US$12,550 (US$25,100 for couples filing together), so it is more difficult to itemize and apply for cancellation.
But many people combine years of donations (called “bundling”) to clear the standard deduction threshold.
However, for 2021, single filers can apply for tax deductions of up to $300 in cash gifts ($600 in joint filings), even if they do not itemize the deductions.
Retirees 70½ years and older can consider the so-called Qualified Charity Distribution, that is, payments made directly from a pre-tax personal retirement account that are not included in taxable income.
People 72 and older can use it to meet the minimum distribution they need each year.
Lawrence said: “If you want to donate to charities in a tax-efficient way, qualified charitable distribution is a valuable donation strategy.”
Pay for medical expenses
If you plan to itemize deductions in 2021 and spend a lot of money on medical expenses, it may make sense to pay off medical expenses before the end of the year to apply for a larger write-off.
In 2021, if the eligible expenses (such as doctor’s fees, consultation fees, prescription drugs, etc.) exceed 7.5% of the adjusted total income, the applicant can apply for a medical expense deduction.
“Qualified fees charged to credit cards on or before December 31, 2021 will be reported on your 2021 tax return,” Harris said.
Postpone revenue to 2022
Those expecting a decrease in income in 2022 may consider deferring income such as year-end bonuses or other payments to January.
“Please note that taxes in 2022 may be higher than in 2021,” said Patrick Amy, CFP and consultant at Overland Park Financial Advisory Services in Kansas. “But it will delay the payment of income tax for a whole year.”
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