Five Tax-Reducing Moves Before Year End

Even though this year brought differing opinions, views, and uncertainty, we all can agree to take tax saving actions is a good idea. Here are five potential tax reduction moves to do before the end of this unusual year.

The new administration has promised to raise taxes, so 2020 may be a low tax year, either because you’ve earned less or you believe tax laws are going to change and be higher.

First, make sure you maximize your 401K/403B contributions. Contributions max out at $19,500 and $26,000 for those over 50. Make sure you contribute $6,000 or $7,000 to your IRA or Roth. Good news, you have until you file or April 15, 2021 to contribute to your IRA and Roth for 2020.

Second, this would be a great year to convert part of your IRA or some of your 401K or 403B plans to a Roth Plan.  Yes, you would pay taxes on the amount converted, but it may be less today than in future years. Also, there is nothing better than receiving tax-free income!

Third, the new administration suggests they will limit charitable deductions by capping the deduction amount for higher earners. To inflate 2020 deductions consider combining several years of charitable gifts.  This year, due to the CARES Act, cash gifts are 100% deductible of your adjusted gross income on an itemized return.

Fourth, manage your RMD (required minimum distribution). For 2020, RMDs are voluntary.  If you are fortunate not to need the income, save your distribution for next year.

Fifth, harvest your tax losses.  Year end is always a good time for tax loss harvesting, and this year there is an added motivation for investors to realize gains and lock in higher cost basis, because of a higher anticipated capital gains rate will be enacted.  Realizing losses by selling poor performing stocks, mutual funds, and ETFs can offset up to $3,000 of income.  Unused losses can be used to offset gains in later years, and losses carried forward do not expire.

Please consult with your tax professional or CPA to make sure you would benefit appropriately with these suggestions.

Yes, 2020 has been an unusual year in so many ways. Most people will be glad to celebrate by bringing in the new year.

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Your friends at Woloshin Investment Management