6 Last-Minute Strategies You Need to Know to Reduce Your 2020 Tax Bill

Tax Planning

Will you need to do any last-minute shopping this holiday season? I do! If you need last-minute tax strategies, we have those for you.

Below are six last-minute strategies that could reduce your 2020 tax bill; these are ideas that could reduce your tax bill or increase your tax return.

DISCLAIMER – Before you read our article about strategies to help you save money and potential tax-related headaches, my compliance team wants you to know that I’m not an accountant. Make sure to discuss any strategies and questions about these ideas with your accountant or tax professional.

Make a Tax-Deductible Contribution to a Traditional IRA, or SEP IRA Contributions

One way to lower your tax bill is to make a tax-deductible contribution to a retirement account such as a Traditional IRA or a SEP IRA (if you’re a business owner).

Traditional IRA – The maximum contribution for traditional IRA accounts in 2020 is $6,000 per person and $7,000 if you are over age 50. You can make contributions through the deadline (April 15, 2021).

For your contribution to be deductible, you need to meet the IRS requirements. This deduction is allowed in full if you are not covered by a work plan.

You may not be eligible to deduct your contribution if you (or your spouse if married) are covered by a plan at work.  Click here to see if you may qualify for an IRA deduction.

SEP IRA – Business owners can contribute to a SEP IRA by the tax deadline (April 15, 2021) or as late as 10/15/2021 if they file an extension. This can help if you don’t have the cash now to contribute or if you will have the funds available to contribute by the deadline.

Increase the Amount You are Saving into Your Company-Sponsored Retirement Plan (e.g., 401k, 403b, SIMPLE IRA, 401a, etc.)

You likely have one last paycheck for the year. If you were in the 32% tax bracket, you could reduce your tax bill by $320 if you put away $1,000 of your last paycheck into your company retirement plan.

Unless you live in one of the seven states that don’t hit you with income tax, this strategy can reduce your state tax bill as well.

If you have not maxed out your company plan contributions ($19,500 for a 401k or 403b) or the catch-up contribution ($6,500 if over 50) this year, there could still be time to adjust your last paycheck of the year!

Make a Charitable Contribution

If you care about a charity and have some extra cash or investments you do not need for retirement; this strategy can help you lower your tax bill while helping others. One downfall of this strategy is that it will not reduce your tax bill if you will be taking the standard deduction.

If you will take the standard deduction in 2020 and itemize in 2021, you could be better off delaying your charitable contribution until January (or anytime) in 2021.

Do the terms “itemize” or “standard deduction” make your head hurt? Learn more about what they mean in this article, or talk to your accountant to determine how you should file your taxes for 2020.

Instead of giving cash, you could gift stock or appreciated assets. Do you have stock or appreciated assets that you don’t need? Are you ahead of schedule to fund the goals in your financial plan (e.g., retirement, college, etc.)?  If so, gifting appreciated assets could be another way to reduce your tax bill. This article contains more information about gifting appreciated stock.

Manage Education Bills or Contribute to a 529 Savings Plan

You may be able to reduce your tax burden by prepaying tuition or contributing to a 529 education account. The American Opportunity Tax Credit provides parents with a $2,500 tax credit for each qualifying student they help with tuition. To qualify, the student must be in the first four years of their undergraduate study.

With the spring semester coming soon, prepaying tuition before the end of the year could be a worthwhile move. It’s important to note that married couples with modified adjusted joint income of under $160,000 can claim the full amount, while those with up to $180,000 can only claim a partial amount. (Source)

While contributing to a 529 may not help you reduce your federal tax bill, it can help lower your state tax bill. Some states allow you to deduct 529 contributions if you are contributing to your home state’s 529 plan. Other states will even allow you to deduct contributions to any state’s 529 plan. You can learn more about your home state’s 529 plan by clicking here and selecting your home state. (Source)

Make a Roth Conversion

A Roth IRA conversion involves transferring retirement funds from a traditional IRA or 401(k) into a Roth account, which could provide you with more tax-free income in the future.

Roth IRA conversions could make sense for a number of reasons, including if you expected your future tax rate to be higher than it is today.

What’s the catch? When you make a Roth conversion, you may have to pay taxes at the time of conversion (unless you have all after-tax money in an IRA account that doesn’t have earnings).

Ripping the tax band-aid off (and paying taxes at the time of conversion) might not be a bad strategy in some scenarios. For example, if you pay taxes today on your conversion because you’re in a low income bracket due to the COVID-19 pandemic (or for other reasons) and take your money out of your Roth IRA in the future (when you’re in a higher bracket), a Roth conversion could benefit you.

Having more money in a Roth IRA means you, or your heirs could have more access to tax-free money in the future.

Talk to your accountant if you need to run scenarios and determine if a Roth conversion could benefit you, especially if your household income is down this year due to a job loss, disability, or the recent Coronavirus pandemic.

Consider Forgoing your IRA Required Minimum Distribution

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, waives required minimum distributions (RMDs) during 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. This waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020.

If you don’t withdraw your RMD in 2020, you won’t pay taxes on that withdrawal this year.

Click here to learn more and see if and when you may be required to take an RMD if you are 70 years of age or older.

Life’s too short to worry about money; learn more about how we can help by visiting our website. Take Our Wealth Assessment to see how prepared you are financially and begin exploring opportunities to protect and grow your wealth.