There's no denying that 2020 has been a challenging year. However, it has also presented us with various tax breaks and the potential to lower our taxes for potentially this year and next year. Today I'm going to share four tips to consider before year-end and to discuss with your tax professional.
- The first one is that required minimum distributions are not required for 2020. This is likely a one-time exemption, and therefore, if you do not need those funds before the end of the year and you haven't taken yours yet, we would suggest you consider letting it sit in your account and continue to grow in a tax-deferred manner.
- Secondly, the 2020 CARES Act created a one-time $300 above-the-line deduction for charitable contributions. Even if you're claiming the standard deduction in 2020, you can still make a charitable contribution up to $300 and write that off against your income.
- The third tip is to consider doing some tax-loss harvesting within taxable investment accounts. When markets are volatile, we have the opportunity to sell holdings that have come down in value, immediately we repurchase something very similar to lock-in that loss. Then, those losses can be offset against current year and potentially next year's income as well. This has the ability to decrease not only this year's taxes but hopefully, future year taxes as well.
- Lastly, if your income has been decreased this year due to unemployment or just less income, you should consider a partial Roth conversion. This allows you to take money out of your existing IRAs and convert it into a Roth IRA, which would allow those funds to then grow tax-free going forward.
Hopefully, these tips are helpful. If you would like to learn more, please visit our Blog at CogentSW.com for additional information.
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