1. Maximize your elective deferrals for 401(k),403(b), and Thrift Savings plans before year end to reduce your taxable income and save for retirement. For 2021, employees can defer $19,500 and for employees age 50 or older can defer an additional $6,500.
2. Self-employed individuals should consider the individual 401(k) or solo 401(k) retirement plan to save for retirement and reduce their income tax. This plan allows the individual to defer the $19,500 elective deferral and 25% of corporate salary (if sole employee) or 20% of their self-employment income, if they are a sole proprietor. The catch-up elective deferral of $6,500 for individual age 50 or older is also available for this plan. It is important to set this plan up before calendar year end, these plans cannot be set up during tax time for a retroactive contribution such as a SEP IRA or Traditional IRA.
3. Taxpayers taking RMD’s from an IRA should consider making a charitable donation from the IRA directly to the charity. The trustee or custodian of the IRA should be instructed to make the check payable directly to the charity of the taxpayer’s choice and the charity must be a recognized 501(c)(3) organization. This is a tax benefit for taxpayers that no longer itemize deductions on their tax return. A charitable donation directly from an IRA will reduce a taxpayer’s adjusted gross income, which could reduce a taxpayer’s taxable social security benefits depending on their other sources of income.
4. If you had a child in the past year or have children, it is recommended to start a 529 savings plan for their future education costs. The Tax Cut and Jobs Act of 2017 expanded the benefits of this college savings plan allowing taxpayers to take up to $10,000 per year in tax free withdrawals towards tuition for students K-12. The annual contribution limits are high and vary from state to state ranging from $200,000 to $500,000. There is no federal tax benefit for contributing to a 529 savings plan, the federal benefit is tax free withdrawals for college costs ranging from tuition, room and board, books, equipment, $10,000 of student loan debt, and apprenticeship programs approved by Department of Labor. Massachusetts residents that contribute to the college savings program or pre-paid tuition program established by the Commonwealth of Massachusetts are eligible for deduction of $1,000 for single filers and $2,000 for married filers.
5. A taxpayer that does not itemize deductions can make a deductible charitable deduction by cash, check, or credit card payment of $300 for a single filer and $600 for married filers.
6. Massachusetts residents and part year residents age 65 and older who own a home or pay rent may be eligible for the Senior Circuit Breaker Credit of up to $1,150 which is a refundable credit. This credit is available to homeowners whose real estate taxes and one half of sewer and water payments exceed 10% of their income and the income for the year does not exceed $61,000 for single filers, $76,000 for head of household, & $92,000 for married filers. For renters, 25% of the Massachusetts resident’s rent must exceed 10% of their income.
7. Investors with taxable investment accounts should evaluate their unrealized gains and losses and consult with their financial advisor on realizing losses to offset capital gains realized for the year.
8. Employees that belong to a high deductible health insurance plan should maximize their annual contributions to a Health Saving Account that have annual contribution limits of $3,600 for individual filers and $7,200 for married filers.
9. Business owners should consider capital expenditures before year-end and seek advice from a tax professional as to the tax benefits that may be available for certain types of assets. Business owners should not payoff loans for capital assets prior to year-end, if they are considering a tax related benefit.
10. Educators are eligible for a deduction of up to $250 for school supplies and protective items.