Lower Your 2020 Taxes
Defer income, if you think you will be in the same or lower tax bracket next year. There are a variety of ways you can delay your income. You may be able to postpone a year-end bonus to next year. If you are self-employed, delay billings until the end of December, this will make it likely that you will receive payment in 2021. When prudent, take capital gains in 2021 instead of 2020. However, if you think you will be in a higher tax bracket in 2021, you may want to accelerate income into 2020.
It isn't too late to reduce your 2020 tax bill. Below are some year-end tax tips to minimize your taxes or even increase your tax refund. Learn these tips and act on them before the end of the year.
Accelerate your tax deductions. You can lower your taxes by contributing to charity. You can maximize the tax benefits by donating appreciated stock or property. If you've owned the asset for more than a year you can deduct its value at time of donation and you don't have to pay capital gains tax on its appreciation. You can further increase your deductions by paying estimated taxes due January 15th before the end of the year. Pay property taxes in 2020 that are due in early 2021. Pay outstanding doctor's or hospital bills.
Take advantage of valuable tax deductions by itemizing if you are eligible. You should most likely itemize if your qualifying expenses exceed the standard deduction which is $12,400 if you are single or $24,800 if you are married and filing jointly. Your tax professional can determine if you should itemize or take the standard deduction.
Keep in mind, if you fall under the Alternative Minimum Tax, accelerating some tax deductions can cost you. The alternative minimum tax was designed to prevent wealthy people from avoiding the individual income tax. It can affect those in the middle class as well. If you are in the alternative minimum tax don't pay income and property taxes due in 2021 in 2020.
Sell investments that are down in value to offset taxable gains you have made in 2020. Losses offset gains on a dollar for dollar basis. If your losses outweigh your gains you can use up to $3000 to wipe out other income. You can carry over losses greater than $3000 to the next year. You can carry over losses year after year indefinitely.
Contribute to retirement accounts. You can lower your taxable income and grow your retirement savings by contributing to a tax-deferred retirement account such as a traditional IRA. Depending on your income and eligibility, you have until April 15, 2021 to make a tax-deductible contribution for the 2020 tax year. These accounts can grow significantly as they grow on a tax-free basis. Company sponsored 401(k) plans are valuable retirement plans made particularly valuable because employers often match contributions. Contribute as much as you can while trying to contribute at least as much as your company will match. A Keogh plan can be very beneficial for the self-employed. It is a tax-deferred pension plan which must be paid into by the tax filing deadline.
Monitor your flexible spending accounts otherwise known as flex plans. These are accounts created through your employer that let you pay for medical and child-care expenses with tax-free dollars. Be careful though, money in the account that you don't use by the end of the year is forfeited! (Some companies have adopted a grace period allowed by the IRS of March 15, 2021.) If your company has not adopted the grace period do what you can to use any money left in the account by the end of the year. You can use any excess money with dentist appointments, seeing the optometrist, and trips to the drug store.
Review tax saving strategies with your accountant for tax advice and to find how you can most effectively save on your 2020 taxes.
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