We’ve got some great tax-saving tips for you, but they require action before the end of the year. There are only a few weeks left of viable tax planning time in 2020, so let’s dive right in.
Do You Need To Act Now?
You may need to pivot your tax plan before the end of the year if any of these factors apply to you:
- You need to increase your liquidity
- You’re in a lower tax bracket than a “normal” year
- You donate to charities
- You are a solo-entrepreneur or Independent Contractor
- You own a business that offers a retirement plan
- You’re age 72 or older
- You’re not sure what to expect in 2021
If any of these factors apply to you, be sure to ask your financial planner about these 10 key tax saving tips that must be implemented now.
Tax Saving Tips: For Everyone
- Skip your RMD.
This year the Coronavirus Aid, Relief and Economic Security (CARES) Act has waived the required minimum deduction (RMD) for your IRA, SEP IRA, SIMPLE IRA or retirement plan account. This can benefit you if you’re trying to lower your taxable income in 2020, or if you want to keep more money in your retirement accounts.
- Increase your liquidity.
If you need to increase your liquidity or cash flow – or even pad your emergency fund – another provision under the CARES Act allows you to withdraw up to $100,000 from your 401k or retirement account in 2020. Some restrictions apply, but this is a creative strategy if you want to make a large purchase, investment or installment in your emergency savings.
- Convert to a Roth IRA.
If you don’t qualify for a Roth IRA in a typical year, but you’re in a lower income bracket this year, then consider a Roth IRA conversion. A Roth IRA allows you to withdraw money tax-free in the future, and it beefs up your tax position in 2020.
- Harvest investment gains.
If your income is lower than usual, you also might consider harvesting gains on your highly appreciated investments. This is another creative strategy if you want to increase your liquidity and decrease future taxes.
- Anticipate the future.
The most important tax-saving tip is to simply plan for what lies ahead. Many people want to forget 2020 and move forward without taking the time to learn from it or adapt to it, but that will only continue to weaken your financial position. Without a plan, you can’t fully understand how to pivot in the future. Thoughtful decisions today and a plan that anticipates tomorrow will set you up for a better 2021 – so you can get back to achieving more.
Tax Saving Tips: For Business Owners
- Re-evaluate your payroll structure.
Many business owners don’t realize how they pay themselves impacts their payroll taxes, QBI deduction and income tax liability. The amount you pay yourself and your family, as well as the pay structure you use, directly affects your taxes, and a few simple changes add up to significant savings.
- Take a QBI deduction.
Sole proprietorships, partnerships, limited liability companies (LLC) or S corporations may be able to take advantage of a qualified business income (QBI) deduction worth up to 20 percent of their net income. There are some restrictions, but this easy deduction is not one to be missed.
- Consider a Roth 401K for your retirement plan.
If you’re having a good year, then consider funding your 401k, which is a write-off. If you’ve experienced a drop in income, however, then consider funding a Roth 401K because its future growth isn’t taxed, and you likely don’t need the write-off this year.
Tax Saving Tips: For Givers
- Donate appreciated securities instead of cash.
If you’re in a higher tax bracket this year, then you might consider donating appreciated securities – such as stocks, bonds or mutual funds – because they are a more effective way to give than cash. This strategy is particularly effective if you want to reduce your tax liability.
- Set up a donor-advised fund.
If you need a larger tax deduction, consider a Donor-Advised Fund. You can pre-fund many years of charitable giving.
Tax Saving Tips: The Bottom Line
As you prepare to make the most of your year-end financial moves, remember to talk with a CERTIFIED FINANCIAL PLANNER™ in addition to your CPA, to get the biggest benefit. At Vance Wealth, we strongly recommend you meet with a financial planner before the end of the year. With only a few weeks left to make these crucial decisions, you don’t have much time to get a plan in place.
To schedule a complimentary consultation with one of our Wealth Advisors — and get a second pair of eyes on your tax plan — please email [email protected] or visit our contact us page by clicking the image below:
Disclosures: Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure. The information provided is for educational and informational purposes only and does not constitute advice. Vance Wealth does not provide tax or legal advice. You should contact your tax advisor and/or attorney before making any decisions with tax or legal implications.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP Certification mark, the CERTIFIED FINANCIAL PLANNER