Some moves to lower your 2021 US Federal Tax liability​

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With 2021 ending, one needs to consider making some moves that will lower your 2021 US Federal Tax liability. Here are a few tips one may consider:

  1. Accelerating mortgage payment in 2021 which is due in January 2022 will give 13 months of home mortgage interest deductions in 2021.
  2. Prepaying state and local income and property taxes before year-end may decrease 2021 Federal Tax liability subject to TCJA limits and AMT provisions.
  3. Evaluate the possibility to defer some taxable income from this year into next year. For example, if you operate a small business that uses the cash method of accounting, you can postpone taxable income by waiting until late in the year to send invoices. This way you may not receive payment until early 2022.
  4. Small business owners can also defer taxable income by accelerating some deductible business expenditures into this year.
  5. US Federal Tax liability: One may be eligible for one of the following tax credits for higher education costs:
  6. American Opportunity credit – Credit equals 100% of the first $2,000 of qualified post-secondary education expenses, plus 25% of the next $2,000. So, the maximum annual credit is $2,500
  7. Lifetime Learning Credit – Credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000
  8. Consider the tax advantage of selling appreciated securities that have been held for over 12 months. To the extent you have capital losses from earlier this year or capital loss carryovers from prior years, selling appreciated investments this year won’t result in a tax hit.
  9. Where the sale of losing investments would cause your 2021 capital losses to exceed your 2021 capital gains, the result would be a net capital loss for the year. Up to $1,500 of 2021 income from salaries, bonuses, self-employment, interest income, and royalties may be shielded using it.
  10. Gifts / Charity
  1. Sell losing investments and claim/carryover resulting in tax-saving capital losses. Then give the cash sales proceeds to relatives.
  2. Give appreciated shares directly to relatives. When they sell the shares, they’ll probably pay a lower tax rate.
  3. Investment in appreciated securities should be donated directly to a preferred charity. Why? Donations of publicly traded shares owned for over a year result in charitable deductions equal to the full current market. value of the shares at the time of the gift. Plus, you escape any capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell donated shares without owing any federal income tax.

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