The holiday season is full of plans and activities that make December incredibly hectic. If you are the average American, tax considerations and financial adjustments are pretty low on your holiday to-do list. However, you are not the average American — you enjoy saving money, are diligent in seeking ways to save, and excellent at following through with your plans. We can help by offering these potential money-saving tips to take to save on this year's taxes.
- Make Maximum Retirement Contributions – If you can afford to do so, max out your contributions to tax-deferred savings plans. For the 2020 tax year, maximum annual Individual Retirement Account (IRA) contributions are $6,000 with an additional $1,000 allowed as a "catch-up" contribution for taxpayers who are at least fifty years old. 401(k) plan annual elective deferral limits are $19,500 with an extra $6,500 catch-up allowed if you are over fifty years old.
- Don't Forget Charitable Contributions – Make any charitable contributions before the end of the year to claim them on your 2020 tax bill — but make sure you retain your records and get appropriate receipts or notifications from the charity. Gifts of $250 or more require an acknowledgement from the receiving group.
- Accelerate/Defer Income – Is your income likely to change next year? Assuming you itemize, you may want to adjust income or expenses as possible to make the greater level of deductions match the greater level of income. If your income will increase in 2021, consider delaying charitable expenses or accelerating income (such as bonuses) ahead whenever possible.
- Deduct Medical Expenses While You Still Can – You can currently deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). This is lower than the 10% threshold used for 2019 taxes.
- Adjust Withholding – If your chosen withholding level is not taking the right amount of your salary out of your paycheck to equal your taxes, adjust it as soon as possible. You cannot overcome eleven months of over- or under-withholding but correct what you can.
While it is enjoyable to get a big refund, it is not economically smart. Your annual withholding should equal or be slightly below your tax bill. If you have withheld extra in order to get a refund, you are just giving the government the interest on your money when you could be collecting it instead. However, make sure you are withholding enough to avoid an underpayment penalty.
- Spend Down "Use or Lose" Accounts – Do you have an employer-sponsored Flexible Spending Account (FSA) to cover medical expenses, or some other account that has a "use it or lose it" approach? If so, make sure that you use those expenses wisely. Wait too long and you may not be able to get an appointment before the end of the year, forfeiting your benefits. Remember, others are probably trying to fit appointments in to use up their FSAs as well.
- Review Your Portfolio – If you have some losing stocks in your portfolio and capital gains to claim, you can sell the losing stocks and use the net losses to neutralize some of the capital gains taxes. Just be aware that the "wash rule" keeps you from buying those stocks back or purchasing "substantially identical" ones within a 30-day period, so make sure the losing stocks are ones that you will not be interested in over the short term.
Notice that most of these tips involve doing a quick trial run of your taxes to evaluate the proper path to take. Who wants to do a tax form in December? You do — because it will save you money on 2020 taxes and time in April 2021 when you have to file your actual return. If you like, think of it as an investment that will finance an extra present or two next year.
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