Year-end tax saving strategies

Posted on: 6 . 1 . 2021

What makes sense for you?

The year is almost over, and you want to reduce your taxable income. What options are still available? The answer depends on your specific financial position.

If you have investments that are doing poorly, you might want to consider selling them so you can claim a capital loss. You can claim a capital loss to the extent you have capital gains, plus an additional $3,000. If you sold stock earlier in the year at a gain, selling stocks at a loss now will offset that gain and reduce your taxable income.

Do you have a high deductible health plan (HDHP)? Consider contributing to a health savings account (HSA). For 2020, you can contribute $3,550 for self-only coverage or $7,100 for family coverage. If you are age 55 or older, you can sock away an additional $1,000 a year. You can contribute up until the due date of your return. You can contribute to an HSA if your qualifying HDHP has a minimum annual deductible of $1,400 for self-only coverage or $2,800 for family coverage.

Maximize 401(k) contributions for which the 2020 limit is $19,500. Employees age 50 or older by year end may also make an additional contribution of $6,500, for a 2020 total limit of $26,000. Take advantage of your employer matching contribution. Review and make appropriate adjustments to the contributions you make to your employer’s 401(k) retirement plan for the remainder of this year and for next year. It’s also a good idea to review your investment elections and their periodic performance.

Another strategy, while not reducing taxable income, is to make Roth IRA contributions. The benefit of the Roth IRA is that the earnings on the IRA will not be taxable to you upon distribution (assuming distributed after reaching age 59-1/2). The ability to make a Roth IRA contribution continues even if you’re participating in an employer savings plan like a 401(k), so it’s not subject to the “active participant” rules that may prevent employees who participate in an employer plan from making deductible contributions to traditional IRAs. Your ability to make a Roth IRA contribution in 2020 will be reduced if your adjusted gross income (AGI) in 2020 exceeds $196,000 and you file married filing jointly (MFJ), or $124,000 if you file as a single taxpayer. You won’t be able to contribute to a Roth IRA in 2020 if you are MFJ and your 2020 AGI equals or exceeds $206,000. The AGI cutoff for single filers is $139,000 or more. Married filing separate (MFS) taxpayers who live together lose the Roth option once AGI hits $10,000.

For 2020 and later, there is no longer an age limit on making regular contributions to a traditional or Roth IRA. The sum of all traditional and Roth IRA contributions for 2020 is limited to $6,000, rising to $7,000 if you’re age 50 or older by the end of 2020.

Finally, consider adjusting your federal withholding. If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by completing a new Form W-4 and increasing your withholding. You should review your withholding to ensure enough tax is withheld if you hold multiple jobs, you and your spouse both work or someone else can claim you as a dependent. If you became married or single in 2020, have added or lost a dependent or expect increased itemized deductions, be sure to provide your employer with an updated Form W-4 to adjust withholding.

Note: Allowances are no longer used on the redesigned 2020 Form W-4. In the past, withholding allowance values were tied to personal exemption amounts. Due to changes in law, currently you cannot claim personal exemptions or dependency exemptions. The 2020 form change is meant to increase transparency, simplicity and accuracy of the form.

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