Enter 2020 with clarity about how you can reduce your taxable income
As we enter a new year, many Americans are working hard to get their finances in order and prepare for upcoming goals. There are many tax planning strategies you can employ that will have a substantial effect on how much you have to pay come tax time, including reducing your income, increasing your deductions, and/or utilizing tax credits. Below are 3 tips to lower your tax bill before April and to set yourself up for a successful 2020.
Maximize Your Pre-Tax Retirement Savings By Deferring Your Current IncomeOne thing you can do to help lower your tax bill is to contribute more money to a tax-deferred retirement savings account. The good news is that you can contribute to an IRA until April 15, 2020 and receive the tax benefit for 2019. You can also contribute to a 401(k) until the April deadline but the tax benefits of this contribution are typically only applied to the calendar year it is withheld from your paycheck.
While maxing out your contributions, be sure to check that you don't go over the annual contribution limit. The annual contribution limit for employees who use a 401(k), 403(b), and most 457 plans is $19,000 for 2019. And if you are over 50, you can contribute an additional $6,000 as a ‘catch-up’ benefit. If you do go over the limit, you’ll have until tax day to withdraw any extra contributions. It’s important to note that any contributions over the limit not only are taxable now, but they’ll also be taxed when you withdraw them down the line.
Be Aware of Any Distributions or PenaltiesCertain distributions could trigger additional taxes or penalties if you aren’t careful. Avoid taking an early withdrawal from an IRA or 401(k) retirement plan if possible. Withdrawals before you reach age 591/2 become part of your taxable income and trigger a 10% tax penalty. Please note, this does not apply to ROTH IRAs.
If you are 701/2, you may have a required minimum distribution (RMD) if you have a 401(k), 403(b), 457, or IRA account. If you do not take your RMD, you will be facing a steep penalty of 50% of the RMD amount. Double check that you are taking your appropriate distribution from these accounts.
Explore Charitable Donation OptionsStandardized deductions are changing the way we used to itemize deductions. However, if your charitable contributions along with other deductions are over the standard deduction, this may allow you to itemize. Not only is charitable giving good for the soul and a great way to declutter your home, but donating things you no longer need is a great way to boost your tax deductions. If you are claiming a contribution of $250 or more, be sure to obtain a written acknowledgment from the organization. For donated items of $5,000 or more, you’ll need to provide a written appraisal.
Another great way to cut down your tax bill while donating to a good cause is to open a donor-advised fund. Putting your money or assets, like stocks or property, in a donor-advised fund gives you the benefit of deducting the full amount of the contribution now, and the freedom to decide which charities you want to donate to later. In addition, any assets you have in your donor-advised fund will grow tax free.
There is a myriad of other tips and tricks to make the most out of tax season including:
- Some employer-sponsored health care plans could give you some tax advantages such as a Health Savings Account (HSA). See what type of HSA you have and if it can be utilized as a tax planning strategy.
- The income ranges for eligibility for making a deductible contribution to traditional IRAs and to contribute to Roth IRAs has increased for 2020 so start planning now for these changes.
- Plan ahead for any refund you may receive. You can apply it to next year’s taxes, receive a refund from the government, or contribute some or all of your refund to certain types of accounts such as an IRA or education savings account.
- In December, ask your accountant if you have any “tax loss carry-forwards” that you can apply. If so, alert your financial advisor of those before year-end.
As the year comes to an end and tax time gets closer, this is a great time for a financial review from an experienced advisor. A financial advisor is a great asset to have working for you. They know the ins and out of financial planning and wealth building. Brentwood Financial Advisors has multi-generational advising experience and is dedicated to the financial well-being of our clients. We can help you with all of your complex wealth issues and give you peace of mind that your money is working for you and your family.
Contact us to speak to one of our dedicated financial professionals today.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.
Investors should consider the investment objectives, risks and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.