With the start of a new year and the 2020 tax season, let’s revisit some tax-saving strategies that can help you save on your taxes this year. Below are some tax tips that will be useful whether you are trying to maximize your refund or minimize what you owe.
Contribute to Your Retirement Plan
This may sound obvious, but it is a great way to save and make a real difference at the end of the year. Investors in the 24% federal tax bracket who contribute $10,000 to a qualified plan like a 401(k) will reduce their income by the same amount. Individuals can contribute up to $19,500 and up to $26,000 if they are age 50 or older. Contributing to an Individual Retirement Account (IRA) is another great way to reduce your taxable income while saving for retirement. The Internal Revenue Service (IRS) allows individuals to contribute up to $6,000 per year to an IRA. If you are age 50 or older, you can contribute up to $7,000 per year. These contributions are tax-deferred, so they can be deducted from your taxable income. Keep in mind you can only contribute to an IRA if you have earned income, though the IRS does allow a working spouse to contribute to an IRA on behalf of a nonworking spouse. There are contribution limits if you are already contributing to another retirement plan like a 401(k), and there is usually a 10% penalty if the money is taken prior to age 59½. And if you haven’t done so already, you have until April 15, 2020 to contribute to an IRA for tax year 2019.
Losing money on your investments is never the goal, but if you have losses, they can be used to offset gains at the end of the year. If you have greater realized capital losses than gains, you can also use up to $3,000 per year to offset ordinary income. Any losses greater than $3,000 can be carried over to future years. While tax loss harvesting is a useful tool to offset short- and long-term gains and reduce taxable income, make sure you understand which investments you are planning to sell and what impact the sale will have on your portfolio and investment goals. If you decide to implement this strategy, it is also important to understand the IRS wash-sale rule, which prohibits investors from deducting losses from sales or trades and then rebuying the security or a substantially identical stock or security within 30 days of the sale.
Make a Charitable Contribution
Individuals can donate or gift up to half of their adjusted growth income and receive a tax deduction. There are several ways to see tax benefits from donating to charity. Individuals who turned 72 after December 31, 2019 must begin taking required minimum distributions (RMD) from their IRAs and 401(k) plans each year. These distributions generally count as taxable income, but if a distribution is donated as a qualified charitable distribution and paid directly to a qualified charity, the individual will not pay taxes on the RMD. Another way to maximize the benefits of donating to charity is to donate appreciated stock. If you have a stock that has appreciated over time, you will have to pay taxes on that growth when you sell the stock, even if you donate the proceeds to charity. By donating the stock directly to a charity, you can avoid paying the capital gains on the stock, you can still take the deduction, and the charity will receive the full value of the donation.