Your Money, Your Independence September is the Best Tax Planning Month. Yes, really.
September, not December or April, is the opportune time as it provides roughly 3 months to execute tax planning strategies for the current year while positioning for the year ahead.
Some usual activities:
Increase 401(k) - If your social security tax stopped after earning $142,800 this year, consider allocating that amount (or more) to 401(k) contributions. This will help lower your Adjusted Gross Income (AGI) or if a Roth 401(k), increase your tax-free savings for retirement.
Tax Loss Harvesting - No need to wait for the last days of December. In fact, many managers do selling in the fall to comply with wash sale rules and be fully-vested for the new year.
Work Benefits - Often, fall is open enrollment, the once-a-year chance to enroll in tax-savings programs like Health Savings Account (HSA) and Flex Spending Accounts (FSAs).
HSAs enjoy triple-tax benefits, as contributions lower your AGI (reducing taxes owed), funds grow tax-free and are not taxed when used for medical expenses, premiums for long-term care and medicare.
FSA contributions lower your AGI and the 3 programs available are Medical, Dependent Care and Transit (commuter or parking).
Unique for 2021 due to government legislation:
Child Tax Credit 2021 - Started getting money from the government in July? Those are “advance payments” up to $3,000 per qualifying dependent child or $3,600 if under age 6 on Dec. 31, 2021. This tax credit reduces your tax bill on a dollar-for-dollar basis, so if you typically owe taxes, might be best to visit IRS.com to opt-out and receive a potential rebate later.
Dependent Care FSA (DC-FSA) 2021 - As referenced in June, new DC-FSA annual limits for pretax contributions increase for most from $5,000 to $10,500. Funding DC-FSA not only reduces taxable income but also avoids Social Security and Medicare tax. Thus, MA family in 24% federal tax bracket may have tax savings up to $3,848 (32% tax bracket is $4,688). But… your employer may opt-in to new limits within their plan, and have to elect funds to increase.
Roth Conversion - The spring “Biden Tax Plan” is still a proposal in late August. Congress would be challenged (to say the least) if new tax laws passed this late in the year were retroactive for 2021. So for some, this may be a 2nd last chance to convert some assets to Roth IRA at current federal tax rates. Roth Conversion analysis takes time given the variables unique to each individual. Most importantly, conversions should be done near year-end with visibility of projected AGI as these are irreversible.
By focusing on tax planning now, you can relax over the holidays with more savings and less taxes. That calls for another slice of the pie.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.