A great portfolio requires strategic planning on how taxes impact investments. See how 2020 tax changes could affect your decisions as you look ahead to filing.
Here are among the things you should be thinking about before filing your taxes:
1. Contribute the maximum to your IRA
You can contribute as much as $6,000 to an IRA, (the same maximum amount as in 2019). If you’re age 50 or older, you can make an additional $1,000 contribution.
2. Defer some income if you can
You only pay taxes on the income you receive during a given year. So, you can put off paying some taxes by deferring some income. While this may be difficult for salaried employees, consider deferring some income until next year. Perhaps you can defer your annual bonus, for instance. If you’re self-employed, it may be easier to delay payments until 2021. You may want to consult your accountant, however, because this only makes sense if you’re going to stay in the same or lower tax bracket next year.
3. 2020 Tax brackets have been adjusted.
Tax rates have remained the same, but income ranges (tax brackets) have been adjusted slightly to account for inflation. These adjustments may cause some individuals to be placed in a lower tax bracket than they were last year. Tax Brackets for 2020 are as follows:
4. Think about additional deductions you can take
Here are some itemized deductions worth paying attention to:
State and local income taxes, property taxes, and real estate taxes are capped at $10,000.
The mortgage interest deduction is a tax deduction for mortgage interest paid on the first $1 million of mortgage debt. Homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage.
Medical expenses more than 7.5% of adjusted gross income (AGI) can be deducted.
No miscellaneous itemized deductions are allowed.
5. Contribute more to your flexible spending account (FSAs)
If your employer offers a health care FSA, take advantage of the increase in contribution limits. Your employer dictates what you can contribute, but the IRS maximum for 2020 is $2,750. Contribution limits for dependent care FSAs, remains at $2,500 for individuals and $5,000 for married couples or individual heads of household.
6. Consider “loss harvesting”
You may want to consider selling some stocks in your portfolio to realize losses, which can then offset any capital gains to reduce your overall tax burden. Losses will offset gains dollar for dollar so this could be a winning strategy for you.
7. Save more on taxes with your health savings account (HSA)
The maximum amount you can contribute to an HSA for 2019 is $3,550 for an individual and $7,100 for a family. If you’re age 55 or over, you can contribute an extra $1,000.
8. You may qualify for the child tax credit
Kids are great, especially since the child tax credit could even be paid back as a tax refund. And, did you know that tax credits reduce your taxable income?
You may be eligible for a tax credit of up to $2,000 per dependent child age 16 and younger, if your household income is below $200,000 for single filers or $400,000 for joint filers. If your child is 17–24, you may still qualify for a credit of up to $500.
9. Beware the “kiddie tax”
A child’s investment income above $2,200 is taxed at the same rate as trusts and estates, which are usually higher than individual tax rates, so you may want to stay under that amount.
10. Alternative minimum tax (AMT) exemption could impact investment decisions
For 2020, the AMT exemptions are $72,900 for single filers, $113,400 for married taxpayers filing jointly, and $56,700 for married taxpayers filing separately. The phase-out thresholds are $1,036,800 for married taxpayers filing a joint return and $518,400 for all other taxpayers.
11. Give More, Save More on Estate Taxes
The unified estate and gift tax exemption is now $11.58 million for 2020. It’s higher than last year, but will expire at the end of 2025.
The gift tax exemption, which allows you to “gift” investments to family members, remains at $15,000 per recipient.