While many of us are planning for the holiday season, it’s also important to begin thinking about tax planning ahead of preparing your 2021 tax return.
Here are a few time-tested tax strategies to consider as we head towards the end of 2020:
- Maximize retirement plan contributions. You’ve heard this advice many times, because it’s one of the best strategies for saving tax dollars, especially when wages are your primary source of income. The maximum contribution to a 401(k) for 2020 is $19,500. You can increase that by an additional $6,500 if you’re 50 or older. For SIMPLE plans, the maximum 2020 contribution is $13,500, and the catch-up amount is $3,000. Can’t manage the entire amount? Try to contribute enough to take full advantage of any matching contributions offered by your employer.
- Time itemized deductions. Amounts you pay for medical expenses, property taxes and mortgage interest are deductible in the year you pay them. However, some expenses must exceed a percentage of your adjusted gross income (AGI) before you receive any tax benefit. For example, out-of-pocket medical costs have to be greater than 7.5 percent of your AGI for 2020. Have less than you need to itemize? Consider accelerating or postponing expenses when possible to shift the deductions into the current or future year, depending on which year gives you the bigger tax break.
- Make the most of charitable donations. Payroll contribution programs and checks written and mailed to your chosen charity before year-end can get you a tax deduction, as can donations made via credit cards by Dec. 31. Donating appreciated stock owned for more than one year is a charitable tax-saver that gives you an itemized deduction for the fair market value of the stock while letting you avoid the capital gains tax generated by a sale. Keep in mind that you have to itemize to claim charitable contributions, and you must have written documentation of your donation.
- Take your required minimum distribution. In 2020, you were permitted to skip taking a required minimum distribution from your retirement plan and not get penalized. You may want to consider, however, taking a distribution anyways. If your income decreased in 2020, you may also be in a lower tax bracket. A distribution from your retirement account would then be taxed at a lower rate in 2020 compared to a potentially higher rate in 2021.
Please call to discuss these tax tips and other ways you can save.