Here are three time-tested steps you can take to begin your 2021 tax planning on the right foot:
- Check your withholding. Confirm you have the right amount withheld from your paycheck in 2021. Doing this will help you make sure your withholdings will meet minimum tax payment requirements so you don’t end up paying underpayment penalties or providing interest-free loans to the IRS. It’s especially important to check if you recently had a change in income, or you’ve experienced a big life event, like a childbirth or new home purchase.You can check your withholding using the IRS Withholding Tool. If you need to change your withholding, complete a new Form W-4 and submit it to your employer as soon as you can. Planning Tip: The W-4 underwent an update in 2020, so the way that withholdings are calculated is different from how they were calculated in 2019 and prior years. Ask your employer how the new calculation works if you have questions.
- Prioritize retirement and savings plans. Take time to review your 401(k), individual retirement account (IRA), health savings account (HSA) and other savings accounts to ensure you’re maximizing your tax savings. Establish a regular contribution schedule early in the year, while taking into account the maximum contribution limits (401(k) is $19,500; age 50 years and over can contribute $26,000; IRA is $6,000; age 50 years and over can contribute $7,000). And if you’re working, make sure to take full advantage of your employer’s retirement matching program. Planning Tip: Make saving for retirement automatic. If you haven’t already done so, consider automatic contributions from your paycheck. If you’re self-employed, schedule automatic transfers from your bank account into your retirement savings account.
- Conduct an investment strategy review. Now is the time to conduct a review of your investment portfolio. This will help you create a tax-efficient strategy that allows you to allocate assets to accounts where tax savings will be maximized. For instance, you may want to include interest-producing assets (like taxable bonds and certificates of deposit) in your retirement accounts so you can defer taxes until they are withdrawn at a time when you may have a lower tax rate. Planning Tip: With how volatile the market may be this year because of the pandemic, consider scheduling more than one sit-down with your investment advisor to go over your portfolio.
Find out more about creating an effective tax strategy using these tips and others when you call to set up a tax strategy planning appointment.