I hate paying taxes.
While I understand the notion that taxes are the price we pay for civilization, I might be content to deal with a slightly less civilized America if it meant I got to keep more of my earnings.
I’m (sort of) joking.
The good news is that there are plenty of legal ways to shield a good chunk of your income from the taxman, and that’s our plan for today.
We’re a long way from tax season. Your tax return for 2021 won’t’ be due until April 15 of next year. But if you want to lower your tax bill, there are steps you can take now. Let’s go over my three easiest-to-follow tips.
Tax Tip No. 1: Max Out Your 401(k)
Let’s start with the low-hanging fruit. Some of the best tax shields are easy and accessible.
If you have a 401(k) plan at work, the easiest way to knock down your tax bill is to ensure you put the entire $19,500 in salary deferral (or $26,000 if you’re 50 or older). And that’s per person.
If your spouse also works and has access to a 401(k), they can max out theirs as well. You have to make 401(k) contributions before the end of the year. (IRAs are a different animal — you can fund them up to the tax filing deadline in the following year.)
We have two months before the end of the year. So, if you’re behind on your 401(k) contributions, you might need to get creative.
Say you have some cash savings you could live on for a couple of months. Well, you could take your salary to zero, putting 100% of your paycheck into your 401(k) for the next several paychecks.
Depending on how far behind you are, that may or may not be enough to max you out. But it will move the needle.
Tax Tip No. 2: Dump Your Losers
With the market on fire for the past couple of years, you might not have a lot of stocks in the red. But if you do … dumping losing stock positions before the end of the year can create capital losses that will lower your tax bill.
This isn’t a massive deduction, as you’re limited to claiming $3,000 in net losses. Any losses over $3,000 simply get pushed into the next tax year.
But, hey, every little bit helps. And if you can drop a couple of duds from your portfolio that aren’t likely to recover, you might as well get benefits from them.
Tax Tip No. 3: Clean Out Your Closet
What if money is tight now, dumping more into a 401(k) won’t work … and you’re such an excellent stock picker that you don’t have any losers to dump?
Well, consider doing a little spring cleaning this fall instead. If you’re like most Americans, you have closets full of clothes you no longer wear. They may not even fit at this point.
And beyond clothes, you might have kitchen appliances, office equipment, sports equipment and a host of other things cluttering up your house that you no longer want or need.
Depending on how big of a packrat you are, you may have thousands of dollars in potential write-offs in items you can donate to charity. I keep my closet threadbare, and yet even I manage to find at least a couple of hundred bucks worth of stuff to donate to Goodwill.
You already spent money on it. You might as well make lemonade out of lemons by getting a tax break when you dump it. Just be sure you do it before the end of the year, and keep detailed records.
I’ll share more tips in the weeks ahead. But in the meantime, these will get you started!
To safe profits,
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.