No matter how much money you make, your goal should be to pay the IRS as few taxes as possible. And the smarter you are in taking advantage of tax breaks, the greater your chances of this happening. Here are some key moves to make in the coming months that will leave you with a much lower tax bill for 2020.
1. Maximize your retirement plan
If you’re hosting your retirement savings in a Roth IRA or 401 (k), you won’t get immediate tax relief for contributions. But if you have your savings in a traditional retirement plan, be it an IRA or a 401 (k), the more money you put in this year, the less tax you’ll pay to the IRS.
For 2020, IRA contributions reach a maximum of $ 6,000 if you are under the age of 50 or $ 7,000 if you are 50 or older. If you have a 401 (k), you can invest up to $ 19,500 this year if you are under 50, or $ 26,000 if you are at least 50. Your savings, meanwhile, will be a function of the tax bracket you fall into.
Let’s say you’re in the 24% tax bracket, which means you pay that rate on your highest earnings. If you put $ 6,000 into a traditional IRA this year, you will reduce $ 1,440 from your tax bill, just like that. And of course, the higher your tax bracket, the more savings you can actually raise.
2. Maximize your health savings account
Not everyone has access to a health savings account, or HSA, but if you’ve signed up for a high-deductible health insurance plan this year, then it’s worth seeing if you’re eligible and invest as much money as possible. Your contribution limit for 2020 will depend on whether you are funding an HSA just for yourself or on behalf of a family. If it’s the former, you can put up to $ 3,550 if you’re under 55 or $ 4,550 if you’re 55 or older. If you are funding an HSA on behalf of a family, these limits increase to $ 7,100 and $ 8,100, respectively.
As is the case with traditional IRAs and 401 (k), the money you invest in an HSA is income that the IRS cannot tax you on. You’ll then have the option to use your HSA contributions to pay for qualified medical bills or immediately invest money you don’t need so it grows into a larger sum, just like you can invest an IRA or 401 (k).
3. Sell losing investments in your stock portfolio
Your goal in buying stocks is to make money. But what if there is an investment taking up space in your portfolio that doesn’t get the job done? If you have specific stocks that have underperformed, downloading them could actually save you a lot of money on taxes.
In particular, any losses incurred in your brokerage account can be used to offset the capital gains, on which you would normally pay taxes. If you take a $ 4,000 loss and have $ 5,000 in capital gains from selling investments at a profit, you will end up having to pay tax on only $ 1,000 of earnings. Additionally, if your investment loss for the year exceeds your earnings, you can use it to offset up to $ 3,000 in ordinary income. And if there’s money left over after that, guess what: you can bring it in 2021 and use it to lower taxes next year too.
The less money you have to pay to the IRS, the more you can hold, invest and enjoy. These strategies are worth employing if your goal is to reduce your tax burden and reap the biggest savings that come with it.