Investor Column | Election results could bring higher taxes. Here are some ways to pay less
Should Democrats sweep Congress, increased taxes may come your way. Let us explore what’s possible to reduce your taxes.
For 2020, the CARES Act allows individuals to write off a $300 charitable contribution — even if you don’t itemize your tax deductions. Make sure you donate to an approved charity by Dec. 31 if you want to take advantage of this tax deduction. Back-up contributions with receipts, credit card statements and canceled checks as proof to support this tax deduction.
Think about donating from a traditional IRA if you are over age 70 ½. Instructing trustees to pay charity directly will not cause taxation, and you do a good deed.
Consider bunching your charitable contributions if it makes sense to itemize deductions. Give more to charity in a year you expect to itemize and less in years you take the standard deduction.
Ponder accelerating and paying property tax bills, unpaid doctor and hospital bills, and non-Florida state income taxes in 2020, rather than 2021.
For those itemizing, consider giving shares of stock that have appreciated, not cash. IRS allows you to deduct the stock’s market value, and you avoid paying capital gains tax on the appreciation.
Many of you received stimulus checks of up to $1,200 for each taxpayer and another $500 for each qualified child dependent. Since the government based payments on incomes for 2018 and 2019, it is entirely possible your real calculated stimulus credit for 2020 is more than you received. If it is, you can claim a refund for this excess.
Increase withholding on your W4 at work if you think you will owe taxes this year. Many of us suffered cash flow issues during the lockdown. Avoid or reduce penalties while you still have time to make corrections. Increase, if applicable, fourth-quarter estimated tax payments, too.
Maximize your retirement contributions. For 2020 you can contribute $19,500 into 401ks and $26,000 for those over age 50. Try to contribute an amount that will ensure matching from your employer.
Sell investments to reduce taxable capital gains. Harvesting investment losses often minimize tax bills. Deduct up to $3,000 more loss than profits — this $3,000 offset other income like salaries and pensions and taxable social security.
Consider using the lifetime gift and estate tax exemption now. Low-interest rates and high gift and estate tax exemptions offer a rare estate-planning. Changing presidential administrations may remove or move down expiring gift and estate taxes. Also, use annual gift tax exclusion to cut expected estate taxes and taxes from retirement accounts inherited from others.
Defer income and taxation to future years with a tax-deductible traditional IRA, or fund a Roth IRA, with after-tax money, if you qualify. Invest for the long-term, of course, but understand funds withdrawn before reaching age 59 ½ may trigger applicable income tax and an additional 10 percent penalty. Exceptions may defend you against these penalties, in any case.
Roth IRA contributions do not yield tax deductions for this year. Still, in future years, distributions from Roth IRAs are usually tax-free. Fund your IRA before April 15, 2021. Most other tax-saving strategies require funding by Dec. 31.
If you think you will earn more than $70,000 most years after reaching age 65, consider converting some of your funds in traditional IRAs into Roth IRAs. A Roth IRA accumulates tax-free, and so are distributions taken from the Roth. It looks like some political changes that are occurring in Washington. Taxes may likely go up next year, so if you have had a rough year, it might be beneficial to opt for a Roth IRA conversion.
Jim Germer is a Bradenton CPA and financial adviser at 100 Third AVE W., Suite 130. Call (941) 746-5600 or email jim.germer@ceterafs.com. Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS Insurance Agency) member FINRA/SIPC. Advisory services offered through Cetera Investment Advisers LLC. Cetera entities are under separate ownership from any other named entity.