The end of the year is normally a very busy time for most individuals. We often face a crunch time at our jobs trying to get important projects completed before the close of the year, and there are all of the different family obligations we need to meet.
Since our 2020 tax returns aren’t due until Tax Filing Deadline of the next year, it might be tempting to not spend any time in November or December thinking about tax planning. But this would be a mistake, since the coming end of the tax year means that you need to make certain decisions and take certain actions before December 31. Here’s why it’s important to start your holiday tax planning today.
Contributions to Your Self-Directed IRA
Fortunately, the deadline for making your annual contribution to your self-directed IRA isn’t until you file your tax return (i.e., as late as May 17th, 2021). But while you don’t need to make the actual contribution in 202o, you will want to plan for that contribution now. If you spend too much money on gifts and travel during the holiday season, you may have a hard time coming up with the maximum allowable contribution ($6,000 for individuals under age 50, or $7,000 for individuals age 50 or older).
Plan For Your Deductions
Apart from creating a plan to maximize your self-directed IRA contributions, the most important part of holiday tax planning will be to identify the various deductions you’ll be able to take, including any tax-deductible you make. You’ll need to make any charitable contributions before December 31, 2021 if you want to claim any available deductions on your 2021 return.
It often takes a bit of advance planning in order to be sure that you have enough cash or other resources available to make the desired deductions. If coming up with the cash will be a challenge but you still want to make a tax-deductible charitable donation then consider a donation of an investment asset that has appreciated in value. Most commonly this will be a gift of stock that has risen in value. Not only will you be able to avoid having to pay tax on the amount of the gain, you’ll be able to take a tax deduction for the fair market value of the asset.
Consider Your 2014 Plans
Part of the holiday tax planning process for 2021 is to give some thought to what types of tax moves might be necessary in 2020. For example, if you anticipate a significantly higher level of income next year, there may be steps you can take now to set yourself up for greater deductions on your 2014 return.
The more time you have two prepare for all of the tax consequences you’ll face in the coming year, the better you’ll be able to address any issues at the lowest possible cost. Consider consulting with an expert for advice for the coming year.