7 Effective Tax Saving Tips You Need to Know: 2020 EditionJanuary 17, 2020
April is tax season, and for some people that can be scarier than Halloween. The average American can expect to pay a little over $10,000 a year in taxes, or 14 percent of their household income.
That’s a sizeable tax bill and one that many people would rather not have to shoulder. Fortunately, there are a few methods that can help slash what you owe in April, and perhaps even get you a refund!
Keep reading to see some of the best tax-saving tips for your federal income tax return!
1. Consider Changing Your W4 Form
Though it won’t reduce the total amount of money that you pay in taxes, changing your W4 will reduce the bill you will face in April. If you see a massive tax bill in 2019, you may want to increase the amount being withheld from your paycheck each week.
This way, when April rolls around, you’ll only have to front a small amount of money, or even be entitled to a refund, instead of having to scramble to get the funds together for a huge bill on short notice.
2. Save for Retirement
Did you know that the contributions that you make to your 401(k) or IRA plans will reduce your tax bill? It’s always better to contribute to a 401(k) plan since your employer will likely match a certain amount of the money that you put in – which is the same as cashing a paycheck for your future self!
In 2020, the maximum contribution to a 401(k) plan is $19,500, or $25,500 if you’re older than 50. For IRAs, you can contribute up to $6,000, or $7,000 if you’re older than 50.
3. Harvest Your Investment Losses
Another key way to reduce a high tax bill is to sell off investments that are not performing well. You can reduce your capital gains tax all the way to zero by doing this and can then use up to $3,000 in losses against non-investment income. If you lose more than $3,000 in a single year, you can carry over the excess for next year.
Keep in mind that if you do this, you can’t buy the same or similar investments for at least 30 days afterward.
4. Give to Charity
Another common way to reduce your tax obligation is to give money to charity. You are able to deduct the value of the contribution, up to 60 percent of your adjusted gross income.
Keep in mind that it may make more sense to contribute securities like stocks to charities instead of straight cash. By doing so, you are able to deduct the fair market value of the stock without having to pay capital gains tax on an appreciated security. Of course, no matter what or how much you donate, make sure that you have documentation for proof. These types of charitable contributions are allowed up to 30 percent of your adjusted gross income.
“…key way to reduce a high tax bill is to sell off investments that are not performing well. You can reduce your capital gains tax all the way to zero…”
5. Defer Income
Depending on your financial situation, it may make sense for you to defer income from one year to the next. For instance, pushing back a raise or bonus to January instead of taking it in December can save you money on this year’s tax bill.
However, this is only a smart decision if you think that you will earn less money or have fewer deductions next year than this year. That way, your extra bonus or raise won’t be taxed at a higher rate, and you’ll be able to enjoy two low tax bills or refunds instead of a large bill and a small refund.
6. Bunch Deductions
In a similar vein to the above point, you can bunch up your deductions in a single year. In 2020, the standard deduction increased to $12,400 for individuals or married people filing separately, and to $24,800 for married couples filing together. Heads of households (those who are single but have a qualifying person) have a standard deduction of $14,100.
Paying medical expenses or accelerating charitable contributions can push you over the standard deduction threshold. The result would be one-year itemizing and one year utilizing the standard deduction. In this manner, utilizing itemized and standard deductions over two years results in more deductions as opposed to two years of standard deductions.
“…funnel gross earnings into an account that you can then use to pay for medical bills, dental costs, or even child-related expenses…”
7. Contribute to a Flexible Spending Account
A flexible spending account, or FSA, is a type of savings plan offered by employers. Through these plans, you can funnel gross earnings into an account that you can then use to pay for medical bills, dental costs, or even child-related expenses in some instances.
This will then lower your gross earnings, lowering your bill come April, while still dedicating money to important purchases. You are limited to contributing a maximum of $2,750 to an FSA in 2020.
You will usually have to spend the balance before the end of the year, as it will not rollover. In some cases, the IRS will allow you to carry over $500 from one year to the next, but your employer will have to have gotten an exception.
The Best of All Tax-Saving Tips is to be Proactive
Now that you know seven of the simplest, yet most effective, tax-saving tips, you can begin to take steps to reduce your tax liability before next year hits. Maintain a plan throughout the year, and always think about the tax implications of any financial decision that your family makes.