Whether you’ve already filed your 2021 income tax return or not, take a look at these tax planning tips!
Everyone’s tax situation is different, but these general tips are helpful for your own personal tax planning purposes and overall being aware of what’s going on with your return.
Saving in taxes starts with being informed and organized and can later turn into tax planning with a professional for your unique situation.
KNOW YOUR TAX BRACKET
The first place to start is just knowing how much you’re actually paying in taxes. Which is understanding how the U.S. tax system actually works.
The U.S. has a progressive tax system, so people with a higher taxable income are taxed at a higher rate and people with lower taxable income are taxed at a lower rate.
One thing to keep in mind is that this is based on your taxable income, which is not your gross income! You can find this number on line 15 of the first page of your tax return. You have other deductions, which we will go over below, that help to calculate your taxable income.
And to properly calculate your tax liability, you don’t just take your tax bracket rate by your taxable income. Here’s a quick example of how it works for a single filer with a $100,000 taxable income and a 24% tax bracket.
| (a) Regular Income Tax Rate | (b) Maximum Taxable Income Per This Bracket | (c) Taxable Income | (d) Tax Due [(a) x(c)] |
| 10% | $9,950 | $9,950 | $995 |
| 12% | $30,575 | $30,575 | $3,669 |
| 22% | $45,850 | $45,850 | $10,087 |
| 24% | $78,550 | $13,625 | $3,270 |
| Total | $100,000 | $18,021 |
Instead of just multiplying the 24% by $100,000 and having a $24,000 tax liability, the single filer really has a tax liability of $18,021 and pays about 18% in taxes overall.
See what tax bracket you fall into below!
| Regular Income Tax Rate | Taxable Income, Single | Taxable Income, Married Filing Separately | Taxable Income, Head of Household | Taxable Income, Married Filing Jointly |
| 10% | $0 to $9,950 | $0 to $9,950 | $0 to $14,200 | $0 to $19,900 |
| 12% | $9,951 to $40,525 | $9,951 to $40,525 | $14,201 to $54,200 | $19,901 to $81,050 |
| 22% | $40,526 to $86,375 | $40,526 to $86,375 | $54,201 to $86,350 | $81,051 to $172,750 |
| 24% | $86,376 to $164,925 | $86,376 to $164,925 | $86,351 to $164,900 | $172,751 to $329,850 |
| 32% | $164,926 to $209,425 | $164,926 to $209,425 | $164,901 to $209,400 | $329,851 to $418,850 |
| 35% | $209,426 to $523,600 | $209,426 to $314,150 | $209,401 to $523,600 | $418,851 to $628,300 |
| 37% | $523,601 or more | $314,151 or more | $523,601 or more | $628,301 or more |
FIGURE CORRECT WITHHOLDING
If you’re employed by a business and receive a W-2 then you should make sure you are having the correct withholding on your paycheck.
If you get a huge refund on your income taxes, then you definitely will want to decrease that withholding on your W-4. This will prevent you from overpaying in taxes throughout the year and allow you to keep YOUR money throughout the year instead of waiting until filing your taxes to receive it. Don’t treat the IRS like a savings account, please. Click here to find out why a big tax refund isn’t good.
On the other hand, if you had a huge tax bill then you may need to have additional withholding on your W-4. You don’t want to be paying additional underpayment penalties. There is a balance of paying too much and not paying enough.
Head to the IRS website and use their tax withholding estimator. You will answer a series of questions and the IRS will actually generate a W-4 at the end for you to sign and take to your employer. You will want your most recent pay stub for yourself and your spouse, if applicable. If you have other variables on your return, like a business, stocks, etc. then also have your most recent statements on hand.
KNOW YOUR TAX CREDITS AND DEDUCTIONS
Tax credits and deductions are awesome because they both reduce your tax bill!
There is a difference between the two though, head here to read more about the difference.
Here’s a quick definition: a tax credit reduces the tax you owe or increases your refund dollar-for-dollar. A tax deduction reduces the amount of your income before calculating the tax you owe.
Here are examples of credits and deductions you may be familiar with:
| TAX CREDITS | TAX DEDUCTIONS |
| Child Tax Credit | Standard Deduction |
| Recovery Rebate Credit | Itemized Deduction |
| Earned Income Tax Credit | Teacher Educational Expenses |
| Child and Dependent Care Credit | Certain business expenses for reservists, performing artists, fee-based government officials |
| Adoption Credit | Health Savings Account |
| Saver’s Credit (Retirement Savings Contribution Credit) | Moving Expenses for members of the Armed Forces |
| Foreign Tax Credit | Self-Employment Deductions |
| Residential Energy Efficient Property Credit | Penalty of early withdrawal of savings |
| Plug-In Electric Vehicle Credit | Alimony Paid *if finalized before Jan. 1, 2019 |
| Premium Tax Credit | Individual Retirement Arrangements (IRA) Deduction |
| American Opportunity Credit | Student Loan Interest Deduction |
| Lifetime Learning Credit | Tuition and Fees Deduction |
Even though you probably have a tax preparer taking care of these deductions and credits for you, it’s always a good practice to stay knowledgeable on what tax savings apply to you. Your tax preparer may not realize that you get a certain deduction or credit since they only see what you provide them.
Being informed can help you maximize your tax savings since you know your life better than anyone else – including your tax preparer!
STANDARD VS. ITEMIZED DEDUCTION
Speaking of deductions, there’s a difference between the standard deduction and itemized deductions, and you have to choose one of the two!
For the standard deduction, you don’t have to do any expense tracking. Your tax preparer just takes the deduction based on your filing status. Take a look at what standard deduction you’d qualify for below.
| FILING STATUS | 2021 TAX YEAR |
| Single | $12,550 |
| Married, filing jointly | $25,100 |
| Married, filing separately | $12,550 |
| Head of Household | $18,800 |
On itemized deductions, you have to track your household expenses, and you also have to beat the standard deduction with those expenses.
Most people don’t beat the standard deduction with their expenses. Therefore, if you’re most people you’re benefiting from the standard deduction because you get a greater deduction than you would if you had to take the itemized deduction. Especially since it doubled with the 2018 tax reform.
Expenses that you need to calculate to beat the standard deduction are medical expenses, tax expenses, interest expenses, charitable contributions, etc.
If you think you have more expenses than the standard deduction, then download the itemized deduction template to calculate what your itemized deduction would be.
After adding up your itemized deductions, if your total is greater than the standard deduction for your filing status then you may want to itemize.
Of course, this total amount that you calculated isn’t the exact amount that will show up on your Line 11 Form 1040. Because there are other calculations that go into it.
For example, your medical expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income, Line 11 on Form 1040.
If your itemized deduction sheet exceeds the standard deduction for your filing status, then it may be worth it to provide this documentation to your tax preparer. Your tax preparer can run the numbers for you and see what works best for you.
If you do take the itemized deduction then you need to save all of your receipts!
RECORDKEEPING
Another part of tax planning aside from being informed and saving in taxes is being organized!
Make sure that you are keeping your tax records for the appropriate amount of time… but don’t become a hoarder over the fear of getting audited!
Head here to read in further detail on how long to keep your tax records.
In most cases, the IRS has three years to decide whether to audit your tax return. So, you definitely need to keep your taxes for at least three years, but there may be certain situations where you need to keep your taxes for longer.
If you claim a loss from worthless security or bad debt deduction then you need to keep records for 7 years.
If you underreport your income by more than 25% then you need to keep your tax records for 6 years.
If you commit tax fraud or don’t file a tax return, then you need to keep your tax records indefinitely. In this case, you should be a hoarder when it comes to tax records!
Make sure you are keeping your records organized when storing them. Whether you have paper or electronic records, one way to stay organized is to have a separate folder for each tax year.
If you store paper documents, be sure to keep your tax records in a waterproof and fireproof safe.
A safer and more efficient option is to store your documents electronically. You can scan your tax records and store them electronically in the cloud or on an encrypted drive. To keep your information safe, set up a unique password or two-factor authentication.
Here’s a general list of records you should be keeping along with your tax return.
| CATEGORY | RECORDS |
| Income | W-2 Bank Statements 1099-MISC 1099-NEC 1099-INT 1099-DIV Brokerage Statements Alimony Received K-1 Forms |
| Expenses & Deductions | Receipts Invoices Alimony paid Statements for donations Gambling losses |
| Home | Closing statements Purchase and sales invoices Insurance records Property tax assessments |
| Retirement Accounts | Form 5498 Form 8606 401(k) statements 1099-R Annual statements |
| Other Investments | Transaction data Annual statements |
MEET WITH TAX PROFESSIONAL
Finally, for specific tax planning, you should always meet with a professional. This will allow your tax preparer to evaluate your individual tax situation and find options to help you maximize your tax savings.
Some strategies may include contributing to retirement accounts or other accounts like a 529 plan, FSA, or HSA. There are also several tax avoidance strategies to be sure you’re not overpaying in taxes. Be sure to meet with your tax preparer before the end of the tax year for planning to be effective!
Stay informed this tax season with tax tips from the Better Than Yesterday blog!
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