Make These Moves Now to Reduce Your 2020 TaxesSubmitted by Moneywatch Advisors on November 16th, 2020
“You must pay taxes. But there’s no law that says you gotta leave a tip”, said somebody once. So check now, while you still have time to do something about it, to see whether you’ll owe or get a refund when you file next year. If you believe you’ll owe, below are some moves to reduce or eliminate that amount.
Test where you stand: The IRS has a very handy Tax Withholding Estimator that helps you determine whether you’ll owe or might get a refund. It’s surprisingly simple - https://apps.irs.gov/app/tax-withholding-estimator.
Max out your retirement account contributions:
The best way to lower your tax liability is to increase your pre-tax contributions to your 403(b) or 401(k) so you get to keep your money rather than send it to Uncle Sam. Every dollar contributed will decrease your taxable income by a dollar.
- The maximum allowed for 2020 for 401(k)s or 403(b)s is:
- $19,500 for those under 50 – this does not include your employer’s contributions;
- $19,500 plus $6,500 for those 50 and over;
- UK faculty and staff can also contribute those same amounts to a 457(b) plan – a great tool to save 2 years for every 1 worked;
- For IRAs, those under 50 can contribute $6000 and those 50 and over may contribute $7000 – those contributions can also reduce your tax liability;
- As the rules are complicated for who qualifies to make tax deductible contributions to IRAs, consult a tax professional or your financial advisor to see if you qualify.
- Unless the total of your state and local taxes plus home mortgage interest and charitable donations exceed the standard deductions of $24,800 for married couples or $12,400 for singles, you likely won’t receive a tax deduction for gifts to your favorite charities;
- Tip: If your itemized deductions are close to that new standard deduction threshold, consider making some charitable contributions this year that you might otherwise make in 2021. This will help you get the most tax benefit from contributions you plan to make anyway;
- You may also gift appreciated stock or mutual funds from your taxable accounts directly to a charitable organization. You may or may not receive a current-year deduction, but you will avoid paying any capital gains taxes;
- While Congress eliminated Required Minimum Distributions for 2020, if you are over 70 ½ and inclined to make a charitable contribution anyway, consider making a Qualified Charitable Distribution directly from your IRA. Employing this tactic means never paying income tax on that amount – on the way into your IRA or on the way out.
A few minutes now may help reduce your tax liability for 2020. Tax preparers can be a resource, but most are better at looking backwards than forwards, so check with your financial advisor first as we like to look to the future.
Steve Byars, CFP