6 Strategies to Lower Your Tax Burden

It's an old adage, but one that especially rings true as we gear up for tax season: if you fail to plan, you plan to fail.

Tax planning is an essential part of any financial plan, and can play a significant role in wealth accumulation over time.  There are a few proven strategies that we've used with our clients to help lessen their tax drag and increase their savings over the years to help them reach their financial goals. You don’t want to miss these simple tax planning opportunities since each one can have a huge impact on your taxes. Let's dive in. 

 

Determining Your 2019 Tax Bracket is the Key to Good Tax Planning 

Start with identifying your sources of taxable income and any deductions you qualify for to reduce this income. It’s also helpful at this stage to project your taxable income for the upcoming year, especially if you’re expecting any big changes, like retirement.

The tax brackets for 2019 are:

Tax Rate

For Unmarried Individuals, Taxable Income Over

For Married Individuals Filing Joint Returns, Taxable Income Over

For Heads of Households, Taxable Income Over

10%

$0

$0

$0

12%

$9,700

$19,400

$13,850

22%

$39,475

$78,950

$52,850

24%

$84,200

$168,400

$84,200

32%

$160,725

$321,450

$160,700

35%

$204,100

$408,200

$204,100

37%

$510,300

$612,350

$510,300

 

The tax brackets for 2020 are:

Tax Rate

For Unmarried Individuals, Taxable Income Over

For Married Individuals Filing Joint Returns, Taxable Income Over

For Heads of Households, Taxable Income Over

10%

$0

$0

$0

12%

$9,875

$19,750

$14,100

22%

$40,125

$80,250

$53,700

24%

$85,525

$171,050

$85,500

32%

$163,300

$326,600

$163,300

35%

$207,350

$414,700

$207,350

37%

$518,400

$622,050

$518,400

Understanding which tax bracket you fall into can be helpful when trying to determine the best strategies to pursue to get tax savings.

 

6 Strategies to Lower Your Tax Burden 

 

If you’re in a high tax-bracket this year, you can try:


Charitable Giving Options

There are many ways to give to charity depending on your circumstances.  And if you currently take the standard deduction, these techniques can put you in the position of itemizing your deductions.

  1. Give to the charity outright. Whether you’d prefer to write a check or swipe your credit card, giving to your charity(-ies) of choice in 2019 and paying in 2020 can yield tax benefits for you as you recover from paying for all the holiday gifts. Additionally, you can “bunch” your charitable contributions into every other year. This permits you to take advantage of the increased standard deduction ($24,400 for 2019 married filing jointly) every other year while itemizing the contributions in other years. 

  2. Qualified Charitable Distributions (QCD).  If you are age 70 ½ or older and receive Required Minimum Distributions (RMD) from your retirement savings, you can designate an RMD be distributed directly to a charity.  This is called a Qualified Charitable Distribution.  This QCD will not be included in your taxable income and it will also meet your RMD requirements.  As a bonus, this is a charitable giving strategy that saves tax regardless of whether you itemize or take the standard deduction.

  3. Donor Advised Fund (DAF).  You can make a large one-time donation to a DAF and receive a charitable deduction for the year the donation was made.  Additionally, you control when the money is distributed to a charity. 
    For example, if you contribute $100,000 to a DAF for 2019, you can receive the deduction on your 2019 tax return. You then can designate a charity to receive $10,000 per year for 10 years.  Moreover, the earnings that accrue while invested in a DAF are not taxed.

  4. Donate Low Basis Stock to Charity.  Do you have a stock that has increased significantly in value and you are in a high ordinary and capital gains tax bracket? You can donate this stock to charity, whether directly or through a DAF. The gain will be transferred to the charity, which is exempt from taxation.  Additionally, you receive a charitable deduction for the value of the stock, which is a total win-win.

Maximizing Your Retirement Plan Contributions

If you’re still working and not contributing the maximum amount into your 401(K), you are missing out on a significant tax-savings opportunity – both immediately and long-term. Pre-tax contributions made to a 401(K)  lower taxable income each year. For 2020, the maximum contribution is $19,500, with an additional $6,500 “catch-up” if you are 50 or older. To ensure you’re maxing out your contributions, log into your company’s benefits website and review your contribution amount.

DON'T MAKE THIS 401(K) MISTAKE IN 2020 


Maxing Out Your Health Savings Account (HSA) Contribution

If your company offers a Health Savings Account (HSA), be sure you’re contributing the maximum amount to it. Similar to 401(K) contributions, HSA contributions can be deducted from your taxable income and can potentially get you into a lower tax bracket. The HSA contribution limit for 2020 is $3,550 for individuals and $7,100 for families. If you’re 55 or older, you can contribute an additional $1,000 catch-up for a total of $4,550 for individuals and $8,100 for families. HSA accounts are only available to individuals covered by a high-deductible healthcare plan.


Tax Loss Harvesting

If you have an investment that has lost value since your purchase, sell it and use the loss to offset gains you’ve made from sales earlier in the year. Similarly, you can use the loss to offset a gain from an investment you are wanting to sell.

Learn More About the Tax Loss Harvesting Investment Strategy

 

4 ways to reduce tax burden in high income year

 

If you’re in a lower tax-bracket this year, you can try: 

The next two items on our list are for taxpayers who find themselves in a low tax bracket year. For example, years after retirement or a year where there is a large business loss.


Roth Conversions

If you have a traditional IRA, you can convert that IRA (or the after-tax portion of that IRA, depending on the type of IRA you possess) to a Roth IRA using a Roth Conversion. A Roth has the advantage that, since contributions are made after-tax, all earnings are distributed tax-free and there are no Required Minimum Distributions at age 70 ½. The downside is that all the tax is due on the conversion.  Therefore, if circumstances are such that you are in a low-income year, you can convert to a Roth and pay the tax at a low tax bracket.


Stepping Up Basis in a Stock

If you have a low- basis stock that has appreciated substantially, you can sell that stock and recognize the gain as taxable income. Because you are in a low income year, your capital gains tax rate will also be low (and could be as low as 0%). If you really like this stock, you can repurchase the stock after 30 days at the current value. This essentially “steps up” the basis by recognizing the gain in a low income year and repurchasing at a higher cost.

 

How Will You Lower Your Tax Burden This Year?

Correctly assessing and projecting your income can have significant impacts on your tax planning and overall financial plan. Our experts at Willis Johnson & Associates are hard at work ensuring that clients receive outstanding tax planning and financial services. To get started on achieving your financial goals, start the conversation with our wealth advisors and CPA to  see what opportunities and tax-savings our team can uncover for you.

 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.