There’s no sugar-coating it: 2020 has been one of the shakiest years most of us have ever seen. Focusing on the financial fallout, the coronavirus pandemic put hard brakes on the global economy, unemployment shot through the roof, and markets embarked on a rollercoaster ride.
To combat the damage done, the government developed stimulus packages, additional unemployment benefits, and other forms of targeted relief (perhaps with more to come). At the same time, all that extra spending went hand in hand with soaring deficits. Regardless of outcomes from the November 2020 election, we could be in for tax law changes and higher taxes going forward.
If we combine some of this year’s extra tax breaks with the long-term possibility of higher taxes ahead, 2020 may be more than just a year of upsets. It could also be a year for seizing unique opportunities to lower your overall tax liability. Following are some sturdy, “four-by-four” tax tips for putting your financial interests on more solid footing.
Four Tax Tips for 2020
- Skip Those Required Minimum Distributions (RMDs): Likely a one-time exemption, RMDs are waived in 2020. So, if you haven’t taken yours yet (and you don’t need it for cash-flow), you can wait until 2021, and keep that money growing tax-deferred.
- Make a Charitable Deduction: The 2020 CARES Act created a one-time, $300 above-the-line deduction for qualifying charitable contributions. So, even if you’re claiming the standard deduction in 2020, you can give up to $300 and claim the extra deduction too.
- Harvest Tax Losses: Depending on your portfolio and market conditions, you may have opportunities to do some tax-loss harvesting while markets are volatile, lowering this year’s, and potentially future years’ tax bills.
- Do a Partial Roth Conversion: Consider doing a partial Roth conversion this year if your taxable income is likely to be lower than usual, placing you in a lower tax bracket. In other words, you might be able to pay less in taxes than you usually would to move some of your assets into a Roth IRA. Once there, the proceeds can grow tax-free and be withdrawn tax-free in retirement.
Four Tax Tips for This Year and Future Years
- Bundle Your Charitable Giving: Instead of giving the same amount every year, consider bundling your charitable contributions or contributing to a donor-advised fund every few years. By concentrating several years’ worth of charitable giving into a single tax year, you may be able to score a better tax break by increasing the value of your itemized deductions to exceed your standard deduction.
- Maximize Your HSA Contributions: If you have a Health Savings Account (HSA), you can contribute up to $7,100 as a family in 2020, plus an additional $1,000 for each of you age 55 or over. Funds in an HSA account grow tax-deferred, and you can withdraw them tax-free for qualified medical expenses. Once you reach age 65, you also can use them for non-medical expenses, paying ordinary income taxes on the withdrawals, but incurring no additional penalty. In other words, your HSA can be another overall tax-wise investment vehicle for you and your family.
- Maximize Your Retirement Plan Contributions: In 2020, the maximum contribution is $19,500 plus a $6,500 catch-up contribution if you are 50 or older. Bonus points on this tip if you’re also able to maximize any matching contributions from your employer.
- Maximize Your 529 Plan Contributions: If you want to contribute to a 529 account, you can use your annual exclusion to contribute up to $15,000 per year to a beneficiary’s 529 account without incurring any gift taxes. If it makes sense to contribute to your state’s 529 plan, you may also receive a state tax deduction.
Could You Use a Tax-Planning Partner?
Since 2010, Cogent Strategic Wealth has been helping busy, thriving professionals just like you make sense of their financial plans and simplify the complexities that stand between them and their greatest financial goals. This includes staying on top of current legislation, and taking proactive steps to minimize taxes whenever opportunities arise.
If you could use a helping hand to reduce the taxable ramifications of your financial pursuits and learn more about the tax tips for 2020 and beyond, consider setting up a Cogent Conversation with one of our advisors today. We’ll listen to what success looks like for you, build a plan tailored to you, and help you execute that plan every step of the way.
Don’t manage your financial future all on your own. Book your Cogent Conversation today!
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