Did you know that making even small financial moves at the end of the year can significantly impact your taxes next year?
Well they can, for better or for worse.
We want to help you take action that will positively affect your taxes in 2021. Read on to learn the following actionable tips to implement before December 31, 2020!
1. Retirement Plans
Take advantage of provisions made available because of the enactment of The SECURE Act in 2019. For example, the age requirement for Required Minimum Distributions (RMDs) was raised to age 72. That means if you will turn 70.5 at some point in 2020 or later (i.e. born on or after 7/1/1949), you will no longer need to begin withdrawing money from your traditional Inherited Retirement Accounts (IRAs) or employer tax deferred accounts (401(k)s, 403(b)s, and 457) until age 72.
To learn more about how The SECURE Act might affect your retirement, click here.
You may also want to consider making contributions to your retirement accounts before year-end. For instance, making deductible contributions to your IRA will reduce your taxable income for the year. In 2020, you can contribute up to $6,000 to an IRA, not to mention an additional $1,000 if you are age 50 or older. Although you have until April 15, 2021 to make these contributions, the sooner you do so, the sooner the funds in the account can accumulate interest tax-free.
2. Health Savings Account
If you have an eligible insurance plan, you should consider setting up a Health Savings Account (HSA).
- Contributions you make are tax-deductible (limits for 2020 are $3,550 for individuals and $7,100 for families. Those age 55 or over can contribute an extra $1,000)
- The money you accumulate is tax-free
- Withdrawals are tax-free for qualified medical expenses for those under age 65. And if you are 65 or older, all withdrawals are tax-free.
3. Time your capital gains or losses
You can do this by:
- Utilizing a charitable remainder trust to avoid getting taxed on the gains and to receive a deduction based on the value of the donation.
- Investing in a Qualified Opportunity Fund to defer taxes on capital gains until 2026.
- Harvesting unrealized losses on your investments. In 2020 you can deduct up to $3,000 in losses against your regular income and offset your losses with current and future year capital gains.
Individuals can give up to $75,000 in a single year as an initial contribution to a student’s 529 plan. By utilizing your 529 plans for your child’s education now, the funds have more time to compound and grow.
You may also want to maximize your charitable contributions to reduce your income tax. You can do this by:
- Planning future charitable donations over the course of a year to maximize your tax deductions
- Donating low cost basis stock
- Contributing to a donor advised fund
What if I’m Self-Employed?
While the above can still apply to you, you may also need to consider:
- Setting up your own retirement account
- How to properly report health insurance
- The auto & home office allowances in compliance with tax law that would allow for maximized deductions
- The pros and cons of making larger purchases this year-end versus pushing the purchases to next year
- Re-evaluating your business entity structure – would electing to be taxed as an S-Corporation be of greater benefit tax-wise?
While these tips can reduce your tax payment next year, we suggest consulting us before you make these adjustments for maximum benefits! In fact, we are currently available for year-end tax planning meetings to personally help you reduce your tax liability next year. Click here to set up your appointment!