2020 has unfortunately been a tough year financially for many. However, you may own a business that is thriving after consumers shifted their purchasing patterns. Or maybe you’ve changed to a more lucrative job, or have substantial gains on investments you’d like to sell. You may be worried about facing a substantial tax bill this year. However, there are steps you can take now that can help reduce your tax burden. Don’t delay, as many of these moves should be made before the end of the year.
Contribute To Retirement Accounts
Saving through a retirement account is one of the best ways to reduce your potential tax bill while helping you reach future financial goals. The money you contribute to a retirement plan is generally deductible from your income taxes and can grow tax-free. If you’re employed, contribute the max to a workplace 401(k) plan, which is $19,500 for 2020, or $26,000 for workers over age 50.
Self-employed? Then you can save as much as 20% of your net profit through a self-employed 401(k), plus an additional $19,000, or as much as $57,000 through a Self-Employed Pension IRA.
Consider Charitable Donations
Before year-end, review the charitable donations you’ve made so far this year. Are there other causes you may want to support? Given this unusual year, you may have missed making your regular donations at your house of worship or dropping off unwanted goods at Goodwill, and need to catch up. You can deduct all of these donations from your taxable income if you itemize your deductions.
If you’re looking to donate a considerable amount of money and the end of the year is coming up, consider a donor-advised fund (DAF). Through a DAF, you can receive an immediate tax deduction for this tax year on the money you contribute to the fund, though you wait until January or later to choose which charity or charities you want to apportion the money to.
If you hold stock or other security that has appreciated considerably this year, you can donate the appreciated security to a qualified charity. Assuming you held the stock longer than a year, you can avoid the income tax due on the gain in the stock’s value. Consider speaking with a financial advisor and/or tax expert to explore your giving options for securities and DAFs.
Reallocate Your Investment Mix
If your investments generate substantial income, consider “asset location,” where you invest in different asset classes following a strategy to help minimize their tax impact. For example, you may want to shift holdings that generate substantial income or dividends to a tax-deferred retirement account. Also, consider municipal bonds for your fixed-income allocation in taxable accounts, to reduce the amount of income you will have to pay in local and federal taxes, especially for a high-tax state like California. A financial advisor can help review your overall portfolio and suggest tweaks that can help reduce your tax burden.
Reducing Your Investment Taxes
We’re all busy, which makes it difficult to follow through on the moves that will help reduce your tax bill before the end of the year. But you don’t have to go it alone. We at Grace Wealth Management Group can help provide you with a financial road map for your tax situation and act as a quarterback with your CPA, estate attorney, corporate trustee, and banker. Don’t wait until you’re facing a big tax bill in April to take action. You can schedule an appointment here, call me at (949) 631-3840 x2, or emailjbang@cfiemail.com.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visit www.financialadvisorirvine.com.