It’s that holly jolly time of year again, but it will look a bit different this year. Large holiday parties will be replaced by small, socially distanced, mask-wearing get-togethers with our immediate family. And the UPS man might be making more stops than usual at your house. But we’ll still have a great holiday season with our loved ones. Before we know it, year-end will be here, and before the clock strikes midnight on December 31st, there are a few ways you can reduce your tax burden for 2020.
Strategy #1: Contribute to Your HSA
A health savings account (HSA) is a great way to reduce your taxable income as dollars are taken out pre-tax for use for healthcare expenses. Employers who offer high-deductible health insurance usually offer an HSA as a benefit for their employees. Funds are taken out of your pre-tax paycheck via payroll and placed in an account for your use.
This year, the maximum contribution amount for self-only is $3,550 and $7,100 for a family, with a catch-up contribution of an extra $1,000 for those 55 and older. (1) If you haven’t hit the max, call your HR department and increase your deduction for the rest of the year or contribute directly with the HSA provider. You will reduce your taxable income for the year.
Strategy #2: Contribute to Your IRA or your Employer Retirement Plan
Contribute to a Traditional IRA. You have until April 15th to contribute to an IRA, but this is just a friendly reminder to contribute now or set yourself a reminder for April. This year, the contribution limit for 2020 is $6,000, or $7,000 if you are 50 or older. (2) Alternatively, if you have a qualified retirement plan at work, you might be able to make one last contribution via payroll deferral.
Strategy #3: Charitable Donations
Because the Tax Cuts and Jobs Act raised standard deductions in 2017, itemizing for average Americans hasn’t been necessary. But this year, the CARES Act has given an added incentive to donate to charity. Every person can make up to a $300 donation to charity and get a deduction on top of their standard deduction.
For those who itemize, the CARES Act added another benefit. Last year generous donors could deduct up to 60% of their adjusted gross income (AGI) as a charitable donation. Congress increased that number to 100% of AGI for 2020. (3)
If you don’t know which charity to give to at the moment, contribute to a donor-advised fund (DAF). A DAF is a 501(c)(3) entity in your name to be used as a charitable giving vehicle. You receive the charitable deduction for the year you donate but do not need to grant the money until later.
Lastly, don’t forget about Qualified Charitable Distributions. If you’ve reached the age where you need to take required minimum distributions (RMDs) from your traditional IRAs, you can avoid paying taxes on them by donating that money to charity. Sure, RMDs were waived in 2020 but this doesn’t mean you can’t take them. If you do this strategy, be sure it’s done correctly by first talking with your accountant first.
Strategy #4: Tax-Loss Harvesting
If you anticipate a large capital gains tax bill for 2020, then it’s time to drop some of the losers in your portfolio to offset the gains. Talk to us about your options, and we can facilitate these transactions with your investment manager.
Strategy #5: Deferring Income
If you can defer income to 2021, then do so. For example, if you expect a year-end bonus, ask your HR if you can postpone payment until next year. If you are self-employed, send out your invoices in late December, pushing payment until January 2021.
We know the last few days of the year can be hectic, but take a breath and let us at Montage Wealth Management know how we can help you with any of these strategies to lower your taxable income for 2020. Email us at firstname.lastname@example.org or call us at (585) 419-2270.