The Illinois CPA Society offers six money moves to help improve your financial health and stimulate tax-time savings.
CHICAGO, Dec. 2, 2021 – If taking care of your physical health has been top of mind throughout pandemic times, your financial health might be due for a checkup, too. The Illinois CPA Society is reminding taxpayers that time is running short to make important year-end money moves that could lead to a financially fit 2022. Here are six tips to consider that could ease your tax burden, boost your tax refund, and keep your finances healthy no matter what’s ahead.
1. Max out your HSA: With health and health care costs top of mind, a tax-smart way of setting aside money for qualified medical expenses and lowering your taxable income is to contribute the maximum allowed (or the maximum you can manage) to a Health Savings Account (HSA). HSAs offer several advantages: You pay no federal taxes on your contributions, no federal taxes on investment earnings, and no taxes on withdrawals if the money is used for qualified medical expenses. In 2021, the contribution limit is $3,600 for individuals or $7,200 for families; an additional $1,000 catch-up contribution is allowed for taxpayers age 55 or older. HSA contributions can be deducted through payroll, or direct contributions can be made to ensure the maximum is met.
2. Donate to charity: What’s healthy for you could help keep your favorite charity financially fit. If you can afford to give this year, the $300 above-the-line charitable deduction enacted in the CARES Act has been extended this year for single filers who don’t itemize deductions and has been increased to $600 for married couples filing jointly who don’t itemize tax deductions. As in 2020, this deduction only applies to cash donations to qualified charities made by December 31. Cash contributions made to private foundations, donor advised funds or supporting organizations, or to split interest trusts, and carry-over contributions don’t apply.
3. Boost your retirement contributions: The end of the year is a great time to do a retirement savings checkup. Contributions to tax-deferred retirement accounts—like your employer’s 401(k) or 403(b)—reduce your taxable income, thus lowering your tax bill, and grow tax-free until distributions begin. The contribution limit for employees in 2021 is $19,500, and the additional catch-up contribution limit for employees age 50 and over is $6,500. For participants in a SIMPLE IRA, the 2021 contribution limit is $13,500, with an additional $3,000 catch-up contribution allowed for those age 50 or over. For those contributing to IRAs outside of employer-sponsored accounts, the contribution limit to an individual Traditional IRA remains $6,000, and an additional catch-up contribution of $1,000 is allowed for individuals age 50 and over.
4. Set up a self-employed retirement plan: Whether you’re newly self-employed or have been running your own business for years, setting up a Simplified Employee Pension (SEP) plan for yourself can give your personal finances a shot in the arm. Self-employed individuals can lower their taxable income by contributing up to 25 percent of their self-employment income (up to $58,000 for 2021) to a SEP IRA. Your SEP IRA must be established by your company’s tax filing deadline (plus any extensions) for the tax year in which the qualifying contribution is made.
5. Harvest investment losses: If you have holdings in your taxable investment accounts that have declined in value since purchase, you can sell them to realize the loss, which will offset any realized capital gains and ultimately reduce your taxable income. Sell these investments by December 28 to ensure the transactions settle before the end of the year. Capital losses offset capital gains without limitation, and an additional $3,000 of realized losses can offset other income—anything above will be passed to the next tax year. Just be aware of the wash sale rule—buying back the same shares or using the proceeds to buy shares of a substantially identical company within 30 days will defer the realized loss.
6. Give a gift: Being gift-giving season, why not give a gift that also gifts you a lower tax burden? If you have wealth that you’d like to pass on to loved ones or other beneficiaries, you can gift up to $15,000 to as many people as you’d like this year without paying a gift tax or reducing your lifetime gift and estate tax exemption. Such gifts can be used for any number of things, like funding a grandchild’s 529 college savings plan, helping a family member with a down payment on a home, or other financial goals. Make these gifts by December 31.
The Illinois CPA Society reminds taxpayers that while everyone’s financial wellness and tax position is different, certified public accountants (CPAs) are strategically positioned to help taxpayers navigate their personal finances and prepare and file their tax returns. The Illinois CPA Society’s free “Find a CPA” directory can help you find the trusted, strategic advisor that’s right for you based on location, types of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.