Proactive tax planning throughout the year is the key to reducing taxes and maximizing your after-tax dollars for wealth accumulation. This is accomplished by applying changes tax laws to your specific situation. Consider the following strategies to lower your 2020 tax bill.
- Consider deferring income to next year and accelerating deductions – See if you can receive a year-end bonus or commission payment in early 2021 instead of in 2020. Accelerate deductions by prepaying state and local taxes, as well as real estate taxes. Before accelerating tax payments, be sure to check with your tax advisor to make sure you are not creating an AMT (alternative minimum tax) problem. Consider charitable contributions, and if the check is mailed prior to year end, it will count as a 2020 contribution.
- Contribute to an Ohio 529 plan if you have children or grandchildren. Ohio allows a $4,000 deduction per beneficiary and the earnings will never be taxed so long as they are used for college expenses.
- Increase pretax salary deferrals to an employer’s 401(k), 403(b), or governmental 457. The deferral limit is $19,500 for 2020 and if you are age 50 or older, there is an additional $6,500 catch up for a total of $26,000.
- Consider a deductible IRA contribution – deductibility based on qualified plan participation and Adjusted Gross Income (AGI) limitations. For non-covered spouse, AGI phase-out for full deduction is $196,000 for 2020 and $104,000 for covered spouse. Under the current Internal Revenue Code, able to make non–deductible IRA contributions of $6,000 each. If age 50 or over, an additional $1,000 catch up contribution allowed.
- If you are self-employed, consider an individual 401(k), Simple IRA or SEP IRA. All allow for pre-tax contributions with maximums that vary based on income.
- If you participate in a high deductible health insurance plan, consider maxing out your HSA, Health Savings Account contributions. For tax year 2020, you can contribute up to $3,550 for individual coverage or $7,100 for family coverage, to your HSA. There is a $1,000 catch-up for those ages 55 and older.
- Individuals age 70½ or older may have as much as $100,000 a year transferred tax free from their individual retirement accounts (IRAs) to qualified charitable organizations.
For more information about the tax planning strategies we utilize, please contact Rob Lemmons, CFP®, CPA, AIF or his team at 513-984-6696.