Lowering Your 2020 Taxes
Rightfully, many are concerned about the election and end-of-year tax planning. Both the presidential and congressional elections remain unknown. Furthermore, even if you knew the outcome of the election, we still don’t know what laws may or may not be implemented next year. Whoever resides in the White House will inherit a challenged economy and have to work through Congress.
Additionally, tax rates are historically very low. The odds of them falling further is low. As such, focus on what is known today and make decisions based upon facts.
Here are strategies that can be used to lower your taxes before January.
1) Harvest stock losses. Review stock sales and harvest tax losses to offset capital gains. Losses can reduce taxable income by $3,000 for joint filers while capital losses have an unlimited offset for capital gains. Unused capital losses can be carried forward indefinitely.
2) Fund retirement. Whether a 401(k), SEP or IRA, all offer opportunities for tax deductible contributions, tax deferral on earnings and creditor protection. Even without an employer match, a 401(k) is a worthwhile opportunity. If you have a non-employed spouse, you can also fund an IRA on their behalf.
3) Roth conversions. Evaluate converting a Traditional IRA to a Roth. This causes the amount converted to be taxed this year at favorable rates. Once converted, the assets and earnings are tax exempt. Since the lower tax brackets are wide this year it pays to analyze how much can be converted before bumping into higher tax brackets. Additionally, a Roth IRA is not subject to age 72 Required Minimum Distributions. The age to begin Required Minimum Distributions has been increased to age 72. This gives even more time to implement Roth conversions before being forced to take distributions.
4) Qualified Charitable Donations. Make Charitable Donations from a retirement plan. If age 70 ½, there is no Required Minimum Distribution in 2020. However, Qualified Charitable Distribution’s are still allowed which sends money to a qualified charity of your choosing. The charity gets the full amount of the distribution and you pay no tax. It’s a “win-win” proposition.
5) Donate Appreciated Stock. Assume you’ve held stock for quite some time with significant appreciation. If you sell that stock to fund charity, you must first pay taxes upon liquidation. However, donating the stock directly to your favorite non-profit, delivers the full benefit of the donation and you avoid paying capital gains tax. Furthermore, you can still qualify for a charitable deduction if you itemize. This is a superior way to benefit charity versus donating cash.
6) Taxpayers who don’t itemize deductions can deduct up to $300 in cash charitable donations while individuals that do itemize can deduct up to 100% of adjusted gross income (AGI) for cash contributions.
7) Bunch itemized deductions. The individual standard deduction is $12,400. Make more donations in years you itemize, and fewer in years you take the standard deduction. Property taxes and state and local taxes remain limited for deductibility.
8) Push or Pull Expenses. Some expenses can be pushed into the next year or pulled into this year. This is important if you itemize deductions. Expenses that can be pushed or pulled might be estimated property taxes due next year, estimated state income taxes due next year, mortgage interest, medical bills or charitable donations.
9) Medical Expense Deductions. Medical expenses have a limit of 7.5% of Adjusted Gross Income for 2020.
10) State & Local Taxes (SALT). The amount that can be itemized for property and state income taxes or sales taxes is a combined $10,000. Depending upon the value of property, the sales tax deduction may be more valuable for Texas residents since we do not have an income tax.
11) Bonus Depreciation. Take advantage of 100% first-year bonus depreciation deduction enabling companies to write off the cost of most depreciable business assets in the year they are put in service. Machinery, equipment, computers, appliances and furniture usually qualify for the tax break.
Evaluating these strategies offers legitimate opportunities to lower your 2020 taxes. Act quickly!