Six Ideas to Lower Your Taxes This Year

By December 6, 2020 No Comments

As we approach the end of the year, there’s still time to reduce the taxes you owe in 2020. Here are six ideas that can save money for many taxpayers.

1. Leverage pre-tax savings

Be sure to take advantage of opportunities to set aside income on a pre-tax basis. Some examples of these opportunities include:

  • Participation in your employer’s retirement savings program.
  • Fully funding Health Savings Accounts (HSA), and “Flex Benefits” accounts that allow you to use pre-tax earnings to pay for childcare and out-of-pocket medical costs. Remember, however, that unlike HSAs it’s important to use up any funds in your Flex health care accounts and dependent care accounts prior to the end of the plan year. Any of these funds not spent by the end of the plan year will be forfeited.
  • Taking full advantage of employee benefits like pre-tax child care, parking reimbursements, and any tuition reimbursement programs.
  • Paying any health care costs with pre-tax dollars.

2. Defer income and accelerate deductions

When you have the option, think about whether it would be better to reduce taxable income in this year or next year. By understanding which tax year will be more advantageous to you, you can act to defer income into a subsequent tax year and accelerate deductible expenses into the current tax year. On the other hand you may believe tax rates will be higher next year. If this is the case you will want to move income into the current year and defer expenses. Here are some ideas if your strategy is to minimize taxable income this year:

  • Delay receipt of a bonus check
  • Make an extra house payment
  • Make extra charitable contributions (that you would make anyway)*
  • Make next year’s church donations this year.*
  • Make extra trips to donate non-cash items prior to January 1st*
  • Review your investments to book gains and/or losses

*Note: With higher standard deductions, many people will not be itemizing deductions each year. If this is you, consider bundling two or three years of deductions into one year. This is especially beneficial with charitable contributions.

3. Harvest gains and losses

Each year up to $3,000 in investment losses can be used to offset ordinary income. This is done after using the tax code’s netting rules. You can also donate appreciated stock to avoid paying tax on the capital gains of the donation. Make full use of these strategies to make tax efficient moves with any investment gains and losses.

4. Maximize tax-exempt and tax-deferred investments

The higher your tax bracket the more tax savings you’ll realize with tax exempt and tax deferred investments in programs and instruments like employer sponsored 401(k)s, IRA’s, tax-free municipal bonds, and Section 529 College Savings Plans.

5. Make full use of your marginal tax

The U.S. ordinary income tax has seven different tax rates with a maximum rate of 37%. The higher rates are like stairs, you go to the next highest rate instantly, when you pass a dollar amount. Knowing this, make full use of a lower rate until you step up to the next level. Those that are taking money out of retirement accounts should make full use of this idea.

6. Avoid penalties

The penalties for improperly filing and failing to file taxes has increased sharply over the past several years. For example, the minimum failure to file penalty has increased from $100 in 2009 to $435 in 2020. Avoid costly penalties and interest charges by getting your tax records in order now.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.