Mid-Year Tax Planning to Lower Your 2021 Tax Bill

Tom Colegrove, Principal for Tax Services at Gorfine, Schiller & Gardyn, provides insights into how to lower your 2021 tax bill with mid-year tax planning tips that taxpayers should be considering now.

Q: What should taxpayers be doing to prepare for year-end?

A: Taxpayers should do a mid-year projection if they want to prevent being under, or over, paid during the year. The IRS has tools on their website to help estimate your withholding. Additionally, you may want to contact your accountant to run a more detailed projection for complex situations.

Taxpayers should also be aware of the quarterly estimated tax payment dates, which occur on the 15th day of each quarter (April 15, June 15, September 15, and January 15). Taxpayers who have income from sources that don’t withhold income tax need to be concerned about paying these estimates for next year to avoid an underpayment penalty.

Q: What should taxpayers be doing or thinking about when it comes to lowering their 2021 tax bills?

A: There are several actions taxpayers should take in order to lower their 2021 tax bills.

  1. Contribute to your retirement accounts. If you’re eligible, contribute to a deductible traditional IRA, or an employer-sponsored 401(k). These are two of the easiest methods for reducing your tax bill. For 2021, you can typically contribute up to $6,000 to an IRA or $19,500 to an employer-sponsored 401(k). These amounts don’t include the catch up for those who are 50 and older. If you are self-employed, you have the option to set up a 401(k) plan or a SEP or SIMPLE-IRA and save even more to get a tax benefit today.
  2. Contribute directly to a charity. Even if you don’t have enough qualified charitable expenses in order to itemize your deductions, you can still receive a $300 deduction if you’re single or $600 if you’re married. This deduction is treated as an above-the-line-deduction, rather than an itemized deduction.
  3. Consider a donor-advised fund (DAF) with a 2021 standard deduction of $12,550 if you’re single and $25,100 if you’re married. You may not be able to claim your charitable donations as a tax deduction, if the total amount of your annual donations is below these dollar amounts. As an alternative, you can consider donating multiple years’ worth of contributions to a DAF if you have the available cash, so you can exceed the standard deduction this year to maximize your benefit. Then, make your cash contributions from the DAF to your favorite charities over the next three years.
  4. Take advantage of a large tax break for daycare expenses coming in 2021. If you have one qualifying dependent, you can spend up to $8,000 in daycare expenses while cutting your tax bill by $4,000. If you have more than one qualifying dependent, you can spend up to $16,000 in daycare expenses, while cutting your tax bill by $8,000. To receive the full tax credit, your Adjusted Gross Income (AGI) must not exceed $125,000.
  5. Contribute to a flex spending account(FSA) or a health savings account (HAS). If you have an FSA, you can save up to $2,750 in 2021. This allows you to pay for medical expenses and pre-tax dollars. Unspent funds in an FSA can now be rolled from 2021 to 2022. If you have a HSA, you can contribute up to $3,600 if you’re single and $7,200 if you’re married. I recommend adding all your contributions to your FSA or HSA in 2021, and determine how much more you can contribute between now and December 31.

Q: Are there any other tips to provide such as checking the current W-2 withholdings or required minimum distribution (RMD) updates to consider?

A: Definitely check your W-2 withholdings and turn in a new W-4 to your employer if you got married during the year or had a child regarding the RMDs. As many of you are aware, the CARES Act suspended the RMD requirement for tax year 2020. As a reminder, you need to begin taking RMDs again in 2021. Consider withholding taxes from your RMD so that you aren’t required to pay in quarterly estimates.

Q: How can Gorfine, Schiller & Gardyn help taxpayers with mid-year tax planning?

A: Gorfine, Schiller & Gardyn is here to help for any tax situation you feel is too complex to handle on your own. For those who need a mid-year tax projection checkup, feel free to reachout to any one of our professionals.

Tom Colegrove has over 10 years of experience in public accounting with a focus in serving tax-exempt organizations, employee benefit plans, and the real estate industry at large. He is responsible for managing the workflow of Forms 990 & 5500 within the tax department. His work also includes tax planning and preparation for individuals, trusts, estates, partnerships, S- Corporations, and C-Corporations spanning many different industries.