Tax Day is just around the corner. Not April 15! I’m talking about the really important tax day: December 31. There are several moves you can make by year’s end that could significantly reduce your tax bill.
And some of these tips are twofers: You’ll save money and lower your obligation to Uncle Sam.
4 Tax Moves to Help You Save Money
1. Max Out Your 401(k) and/or IRA
These tax-deferred retirement accounts are the common man’s tax shelter — use them to the max! In 2020, you can contribute up to $19,500 to your employer’s 401(k) or $26,000 if you are 50 or older. The max contribution to an IRA is $6,000 or $7,000 if you are 50 or older. These contributions will reduce your taxable income this year and will grow tax-free until you make withdrawals during retirement. Here are a few other ideas to build wealth in your 50s.
This may seem like a no-brainer, but too many people still don’t take full advantage of these programs, which slows the growth of their retirement funds and leaves income open to being taxed.
- Target Date Funds
- 6 Things to Know Before You Start a 401(k)
- How to Open a Roth IRA
- How to Start Investing and Saving for Retirement
2. Adjust Your Savings Plan
Comb your savings portfolio for losing stocks and sell them. Those losses can be used to offset your capital gains. If your losses are greater than your gains, you can use up to $3,000 of losses to reduce your ordinary income.
A word of advice: Don’t let a tax reduction strategy interfere with your long-term investment strategy. Think carefully before selling a “loser” stock. Is it a quality holding that’s just in a slump?
3. Reap Rental Losses
On a similar note, if you have a rental property that lost money this year, ask your accountant whether you might qualify for a net operating loss deduction. If you were actively involved in renting the property — meaning you didn’t use a management company — you can apply losses of up to $25,000 against your total taxable income. There’s lots of fine print on this one, so be sure to consult a professional before just slapping it down on your 1040.
4. Max Out Your Health Savings Account
If you are enrolled in a high-deductible health care plan, consider opening a Health Savings Account. HSAs are similar to tax-deferred retirement accounts. The money you contribute to your HSA reduces your taxable income in the year of the contribution. Withdrawals made from the HSA to pay for qualified medical expenses are also tax-free.
But here’s the thing: If you have a healthy year and withdraw little or no money from your HSA, it can continue to grow tax-free for years. For 2020, you can contribute up to $3,550 to an HSA for an individual and $7,100 for a family.
Implement one or more of these strategies by December 31 and you may really have something to celebrate on New Year’s Eve: a lower tax bill!