As the end of the year approaches, your time is running out to accomplish several common end of year tax reduction strategies. Here’s a few items to consider today, before the end of the year arrives:
First, new in 2020 is a special $300 deduction for charitable contributions.
This was included as part of the CARES act, passed as part of the relief bill during the coronavirus epidemic.
This deduction is available for those who claim the standard deduction and who are not normally able to deduct small charitable donations. The donation must be made to a qualified charity, and it must be made in cash in order to count towards the deduction. Donations of items such as clothing or furniture will not count towards this deduction.
Next, if you have a taxable brokerage account, look to see if there are any investments that have lost value that you can sell.
This is called tax loss harvesting, and can get you up to a $3,000 deduction this year. It can also be used to offset an unlimited amount of other gains you recognized during the year.
These opportunities are usually available during volatile years like we have seen recently, just be sure you are knowledgeable about the IRS rules, and specifically what is called wash sale rules.
We have another blog post and webinar that has much more detail on the benefits and potential pitfalls of tax loss harvesting. You can view that here: Reduce Taxes with Tax Loss Harvesting
Lastly, it’s a good time to think about what your yearly income will be and where you stand in the tax brackets.
If you have a lower income year, you may be better to take advantage of a lower tax rate by contributing to a Roth IRA or Roth 401(k) account this year.
If you have higher income, or need additional tax deductions, contributions made to a traditional IRA, 401(k), or HSA might be better.
For those with exceptionally high income this year, perhaps from a severance offer or large bonus, you may also want to consider making charitable contributions to take advantage of the larger deduction.
We have more on how to develop a charitable giving plan, big or small, here: Developing a Charitable Giving Strategy to Maximize Your Giving
For 2020 you are able to save up to $6,000 in an IRA or Roth IRA ($7,000 if you are age 50), and up to $19,500 in a 401(k) ($26,000 if you are age 50 or older).
Tax planning can be complicated, but even these simple steps can be enough to save you hundreds in taxes this year.