Football season is officially in full swing, Halloween is just around the corner and before we know it, the holiday season will be upon us. Yes, we have finally reached the fourth quarter of 2020, and considering how wacky this year has been, many cannot wait to see 2021.
Before we reach Jan. 1, however, it might be a good idea to sit down with your financial adviser and certified public accountant to explore options for savings this coming tax season.
Tax law provides several avenues for lowering adjusted gross income, which lowers tax liability. With a little consultation, many taxpayers can drop their AGI levels significantly and perhaps even drop it to a lower tax bracket, saving thousands of dollars. Here are a few basic strategies that are worth considering.
Filers can reduce their AGI substantially by contributing maximum amounts to their Individual Retirement Accounts and 401(k) retirement accounts. For example, individuals can contribute up to $19,500 to their 401(k) accounts and for those 50 and over, the maximum is $26,000.
Also, contributions to Health Savings Accounts are tax-deductible. An individual can contribute up to $3,550, and a family can contribute up to $7,100. Individuals who are 55 or older can contribute an extra $1,000.
Meanwhile, individuals on the cusp of moving into a higher tax bracket can avoid paying the higher tax rate through proper investment strategies.
Under IRS guidelines, individuals who make more than $163,300 must pay a 32% tax rate on each additional dollar above that tax bracket threshold. But those additional costs can be avoided through retirement savings. For example, if the individual’s AGI were $182,800, they could contribute the maximum of $19,500 to their 401(k) plan, avoid moving into the 32% tax bracket and achieve a tax savings of $6,240. Married couples who file jointly can see a similar outcome with an AGI of $326,600.
Financial market volatility also can be used to an advantage when investors sustain losses. As painful as they might be, there are ways to turn disappointing investments into tax benefits. In taxable accounts, investors can use losses to offset capital gains through a strategy called tax-loss harvesting. This is an approach that is intricate and complicated, but when handled properly, it can provide a nice benefit to investors. The key is having a proactive advisory team to ensure you are satisfying the requirements of this strategy.
The Internal Revenue Service allows tax-losses to be used to reduce AGI by up to $3,000 in net capital each year. Those who have lost more than that can carry the remaining losses forward for use in future years.
To spur charitable giving amid the pandemic, Congress included a new tax deduction provision in the CARES Act, enacted to provide economic assistance to workers, families, and small businesses.
Normally, tax deductions for charitable contributions only benefit those who file itemized tax returns. This year’s CARES Act is allowing those who take the standard deduction to take an additional deduction for qualified charitable gifts of up to $300 for individuals, or $600 if married. Additionally, an individual who itemizes can deduct 100% of contributions, up from 60%. Corporations can deduct 25% of taxable income, up from 10%.
These are just a few options for achieving tax savings, and there are others depending on financial circumstances. So, it may be a good idea to schedule time with a financial professional this fall, so you can be ready for better days ahead in 2021.