As you look into tax-saving options for your investments, you should have your financial advisor work with your tax advisor so they can give you more personalized advice about your financial goals. But there are some things you can do at the end of the year that could save you money on your taxes.
Here are four year-end tax strategies to consider:
#1: Deduct your medical expenses
If you itemize your tax deductions, you might be able to deduct any eligible and unreimbursed medical expenses that are above 7.5% of your adjusted gross income (AGI). There are a variety of medical expenses that might be tax deductible, so be sure to visit the IRS website or a tax professional for more detailed information.
#2: Have a smart tax strategy for your stocks
If you have a portfolio that’s properly diversified, you’ll have investments that will increase or decrease in value. And you might be able to use a loss to reduce your tax liability for that specific calendar year. This strategy is known as “tax-loss harvesting.” And with recommendations from your advisor, you can immediately reinvest in an asset that offers a similar risk/return profile as what you had recently sold. This will allow you to stay invested and take advantage of any potential future rally in stock prices.
#3: Make a charitable contribution
If you’re 70 ½ or older and would like to support a charity that’s important to you, think about making a qualified charitable distribution (QCD) from your IRA. You can’t, however, make this type of contribution from a 401(k) account.
Some people can make a QCD and have more tax advantages than what’s available with a standard charitable contribution, which can include:
- The reduction of your AGI and taxable income for the 2020 tax year.
- Can work whether you take the standard deduction or itemize your deductions.
- Allows a contribution of up to $100,000 per year. A standard charitable deduction is usually limited to no more than 60% of your AGI.
Because of the CARES Act, here are some important considerations for the 2020 tax year:
- The required minimum distributions (RMD’s) are waived for 2020.
- Taxpayers who don’t itemize can deduct up to $300 in charitable contributions, which must be made in cash to certain charitable organizations but not to donor-advised funds or certain private foundations. However, a charitable contribution carryover doesn’t qualify for this deduction.
Be sure to speak to your tax professional for more advice.
#4: Make a contribution to your IRA
You should think about making a contribution to your traditional or Roth IRA, which you can do as a lump sum. The maximum total of your annual contribution across all your IRA’s for 2020 is $6,000, or it could be $7,000 if you’re 50 or older by December 31, 2020.
Your contributions to a traditional IRA might be tax deductible, but it will depend on your income level and whether you have a retirement plan at work. Your eligibility for a contribution to a Roth IRA will also depend on your income level. They don’t give you a current tax deduction, but you can make distributions without paying taxes if certain conditions are met. For the 2020 tax year, the contribution deadline is April 15, 2021.
For more advice about how you can maximize your tax deductions as an investor, be sure to get in touch with Trevor Shakiba at Shakiba Capital.