Now is the perfect time to review several opportunities to potentially reduce taxable income for tax year 2020.
Manage Marginal Tax Rates
Those serious about reducing their income tax bill need to review opportunities before the year ends. Putting together a projected income for year identifies if the taxpayer is closing in on a higher tax bracket. Does it make sense to accelerate income due to prospect of higher tax rates or to potentially defer some income into 2021? For those that itemize, there may be a possibility of accelerating medical expenses or combining charitable donations into 2020, rather than spreading them out into 2021. Finally, contributing to an IRA or minimizing taxable interest income, dividends and capital gains exposure to the extent possible may help drive down taxable income.
Consider Roth Conversions
Although Roth conversions might generate immediate taxation, federal tax rates are historically low and may not stay that way for long. Converting a traditional IRA or pre-tax 401(k) fund to a Roth IRA allows retirement funds to grow tax-deferred and distributions are potentially income-tax free. Retirees younger than 72 might consider converting to remove assets from traditional retirement accounts and drive down inevitable Required Minimum Distributions (RMDs).
Maximize Employee Benefits
This is usually a time for open enrollment for many employees. Reviewing employee benefits might present options to maximize tax-deductible opportunities. This may include contributing to an HSA or FSA next year or potentially contributing more than a matching percent in a retirement plan. How much to contribute? That’s a great question to ask a financial professional.
IRA Changes for those at 70
Those over 70 ½ who are earning income can contribute to their IRAs (meaning next year, someone at age 72 could theoretically take Required Minimum Distributions and make IRA contributions the same year). Additionally, clients who had their RMD waived this year should consider converting the RMD amount to a Roth IRA. This is a one-time opportunity since RMDs in a normal year are not eligible for conversion. To qualify for tax year 2020, all conversions must take place by December 31.
Year End Tax Analysis
Since the tax year ends December 31, these last few months present a critical time to review your income tax expectation. Review 2019 income tax returns, current paystubs, and projected taxable investment income. Our goal is to work with clients and their accountants to seek out tax savings opportunities and provide recommendations before the year-end tax deadline.