It is important that you do not wait until tax time to talk to your accountant, and the reason for that is that you can have a plan in place prior to the beginning of the year, where you are going to be taking advantages of tax benefits. That is going to impact you not only for 2021, but also going forward longer term.
Here are Some Tax Tips for 2020 and 2021
You always want to take a longer-term view on your financial situation and not just plan from year to year or worse, just go to your tax account and hand them off your tax document. That is not the most efficient use of your money and there are many things that you can do to save on taxes.
The very first thing that I would say is that you want to review your W4 form. This form can be reviewed at any time during the year, but since we are starting up a new year, now is a great time to just go back and look at your deductions.
When you are reviewing your W4 form, you want to review it in conjunction with your pay stub, because you would not have gotten your W2 form as yet. Your W4 form shows how much of a deduction you will be taking for the year from your paycheck, and if, when you did your taxes this past year, you got a large refund.
If your salary for last year hasn’t changed then you are making an interest-free loan to the IRS. So, what you can go to do is go to your W4 form and reduce the deduction that you have on that form, so that you are getting more of your money during the year, instead of waiting until the following year, sometime until around April. You get that money to use because it is your money.
Conversely, if you find yourself always owing taxes at the end of the year, you want to do the opposite, especially if you struggle to come up with the payments by the tax deadline. So, consider increasing the amount that is deducted from your paycheck on an annual basis.
Now, the reason why I recommend that you do this in conjunction with your accountant, is that they can do some simple calculation, especially if your income has changed, and they will give you very good guidance in terms of what you want to include on that W4 form. For you to be getting all your money in your pocket during the year, instead of waiting until year end so that you can know how much you really need to pay so that, at the end of the year, you are not paying additional taxes.
The second thing that I want to talk about is to contribute to your IRA. The amount that you can contribute for 2020 is six thousand dollars or seven thousand dollars if you are over age of 50,
That is for your IRA and then you would be able to deduct that amount. When you do your taxes, that is going to reduce how much you will have to pay in taxes.
Another reason why you want to speak to your accountant is because you want to make sure that your income is not too high so that you can get that benefit. If your income is too high, you can still contribute, but you will not get the tax benefit. That is the difference.
Health Savings Plan
You can also contribute to, and the HSA. The HSA is a health saving plans account for 2020. The maximum amount that you can contribute is $3550.00 if you are single and $7100.00 if you are contributing to a family account.
The contributions can be made up to April 15th of the following year.
The HSA is a tax-exempt savings account, and it allows eligible taxpayers to contribute free tax dollars to an account earmarked for medical expenses that are not covered by insurance. This election can only be made if you have a high deductible savings plan between the IRA and the HSA.
You can deduct almost ten thousand dollars from your income to reduce how much you will be paying in taxes at the end of the year, and then that is also a great way to save for retirement.
Tax Loss Harvesting
The third thing that you want to do if you are an investor, is to harvest and rebalance your portfolio. What does that mean? If you had investments that you sold during the year or if you have any kind of capital gains that are taxable, then you can offset that against any losses that you had from sale of your investments, up to three thousand dollars.
This one is kind of tricky. When I talk about offsetting it against a loss, while this is a benefit right, if you had all these capital gains and if you have certain stocks in your portfolio that are at a loss position, you can sell it. And you cannot get that benefit, but if these stocks are great potential investment that are just having a bad year, then you may not want to sell them just so that you can take advantage of that tax benefit.
Because in the long run you may be missing out on a stock that has really great potential, so that is where you are going to have to balance out whether you want to apply this strategy.
But if this is a stock that is been sitting in your account for, very long and you think It is more of a deadweight stock, then you just do not want to hold it in your portfolio anymore. Then you can sell it and take advantage of this tax loss harvesting.
Of course, at year’s end, It is also a good time to revisit your portfolio. When you came up with the strategy for your portfolio, you want to go back and look at that strategy and see if what you have in your portfolio is matching up to the strategy. If it is not, you may need to plan for 2021 on how you want to rebalance that portfolio.
This would only apply to you if you are retired and you are 72. The IRS changed the requirements for retirement savings plan like your IRA or your 401k, where, when you are age 72, it is mandatory that you start withdrawing from your tax deferred retirement account.
However, as a result of COVID-19, this was paused, which means that, if you are 72 during the current year, you do not have to take the required minimum distribution. That is a big positive for retirees who do not necessarily want to withdraw from their tax deferred account. One of the strategies that can be employed is that since you do not have that tax liability this year, you may want to use this as an opportunity to convert this tax deferred account to a Roth IRA.
Because when you have a Roth IRA, there is no required minimum distribution and therefore you’ll be able to leave your money in there and have it grow for a longer period of time. It is also a time when you can take advantage of an opportunity to sell some of your investments that have appreciated in your taxable account. Because now you have less income, that is being taxed and therefore you can pay the capital gain tax on some of these assets that are in your brokerage account.
The last thing that I want to talk about is planning to give under current tax rule. You can deduct charitable contribution only if you itemize your deduction, so there is standard deduction which is a number given to you by the IRS. For each of the categories, whether It is single married head of household or married filing separately, this is a number that most people default to.
However, some other individuals may have a lot more expenses.
For example, someone who may have a mortgage and other items that they can deduct, they would take what is called an itemized deduction. The itemized deduction is greater than the standard deduction.
Even if you have a standard deduction, as a way of reducing your income in the current year, if you donate to your favorite charity, you will be able to decrease how much you will be paying for taxes. Now, it is not that much that you will be benefiting, but It is also a way to do a good deed as well.
Sometimes people want to give, but they do not feel like they are getting any benefits or maybe they do not give. But this will be an incentive to give to someone who is in a less fortunate situation through your different favorite charitable organization. Those are the five tips that I have for you for 2020 and going into 2021 in terms of what you can do now.
Other quick reminders: remember to include all income in your tax document when you go to your tax accountant. Remember that if you collected unemployment, that you will need to pay taxes on that, a lot of people missed that and if you did not have taxes deducted when you receive the unemployment, your tax liability is going to be more.
Your tax accountant will be able to help. You note, however, that if you received a stimulus check, that is not considered income and It is not taxable, and if you did not receive a stimulus check. You should also discuss that with your accountant to determine one if you qualify and two, if you qualify, you may be able to claim that recovery rebate credit on your tax return for 2021.
It is important that you are communicating with your tax accountant and sharing all this information with them to make sure that your taxes are done right. You do not want to go a couple years and find out that you missed something. And then there is a penalty associated with it.
There is no better time than now to start doing your financial checkup. You should take advantage of tax planning that will benefit you in 2020, but also set the stage for 2021. Your goal should ultimately be to legally reduce your taxes as much as you can.
If you do not have someone that does your taxes on a regular basis, I highly encourage you to find that person, because if you keep moving from one place to the next, that is where things get lost in the shuffle.
You always want to make sure that you are consistent and that you keep records of all your tax information.