As soon as the Times Square Ball drops to welcome in the New Year, the countdown begins and tax season is underway. While your 2019 taxes might be top of mind, there’s plenty you can do now to make a greater impact on your 2020 taxes.
It might feel early to think about 2020 taxes when you haven’t yet filed taxes for 2019. However, now is actually the best time to make changes for tax planning. The reason is simple—almost all financial decisions have a tax impact. And, decisions you make in the first part of this year, will certainly impact your tax burden for 2020. If tax implications are not taken into consideration while making financial decisions throughout the year, you could be paying more in taxes than you need to. Tax planning should not be seen as a separate act from financial planning; instead, tax planning should be done in tandem with decision-making for your overall financial plan.
Getting a jump on your tax planning and incorporating it into your financial vision improves the probability of meeting your goals, particularly when planning for retirement. By analyzing your current and future liabilities, and utilizing strategies to shift or minimize the amount of taxes you pay at the end of the year, you will be able to more effectively plan for current and future cash flow needs. Therefore, tax planning is a key component in creating a practical and sustainable financial plan.
There are several tax strategies that may be worth exploring as you prepare for the year ahead. Below, we explore a few tactics to keep in mind:
- Save in tax-advantaged plans. Now is a great time to review your annual contributions to 401(k)s, Roth IRAs, and 529 plans. Why is that? The more money you put into these plans, the greater the amount of income you shield from taxes. In 2020, the IRS announced individuals can contribute up to $6,000 to an IRA if you’re under 50, or up to $7,000 if you’re 50 or older. If you contribute to a 401(k), the annual limits are even higher–up to $19,500 for those under 50, or up to $26,000 for over 50. The money put into the traditional version of either plan goes in tax free, and your savings are determined by the tax bracket you fall into. It’s important to note, while these contributions may not seem significant now, the snowball effect of compounding interest makes these investments, particularly due to the tax benefits, that much more enticing.
- Strategically sell your investments. In a perfect world, all of your investments would do well. Unfortunately, we don’t live in a perfect world. In all likelihood, your portfolio contains holdings across a wide spectrum of asset classes. As a result, some have performed better than others. For tax purposes, you may consider selling some of these assets. When an investment is sold for a gain, the amount paid in capital gains taxes can be offset with capital losses. While it may seem that losses have no inherent benefit, harvesting losses could save you in taxes now and potentially yield larger savings down the road. This approach—referred to as tax-loss harvesting—is commonly practiced within sophisticated investment portfolios, but can also be applied to individuals of all means.
- The bunching effect. The current standard deduction is much higher than it was prior to the Tax Cuts and Jobs Act (TCJA), the most recent tax reform act. For many taxpayers, it makes less sense to itemize deductions, which means deductible expenses may no longer provide tax benefits. For some expenses, you may want to consider a “bunching” strategy, where you either accelerate, or defer, deductible expenses so that more of them happen in one tax year, rather than spreading them over multiple years. This technique has been used to help taxpayers exceed the adjusted gross income thresholds for deducting medical or miscellaneous expenses, such as charitable donations.
- Keep an eye on new laws and proposals. In particular, we recommend individuals pay close attention to the changes associated with the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act became law on December 20, 2019 and adjusted rules related to retirement accounts. This is the second notable financial planning law change in only three years. The first was in 2017 when TCJA significantly changed the tax code. Most notably, the SECURE Act will eliminate stretch IRA and qualified plan rules for certain beneficiaries and replace them with a 10-year distribution requirement.
These are just a few of the many tips and tactics to consider as you set your plan for the year ahead. It can be challenging to think through all the planning you need to do at the end of the year. There’s much to consider, so the further out you look to plan your tax situation, the better your chances of reducing your tax burden and making informed decisions by year end to avoid surprises when April comes around.
Everyone’s situation is different, if you have questions or would to schedule an appointment to discuss your personal needs and circumstances, give us a call at (617) 342-5600 or email firstname.lastname@example.org.