6 “Hidden” Tax Savings Opportunities Before Year-End

The 6 “Hidden” Tax Saving Opportunities Opened Up by New Tax Rules

Our topic on this episode of the Ready for Retirement podcast is “6 “Hidden” Tax Savings Opportunities Before Year End”.

Maximizing tax savings can be one the greatest ways to save money, James gives a checklist of six things we should review for tax savings before 2020 comes to a close. 

Should I take an itemized deduction or standard deduction? When is it best to do charitable giving? How can I lower my future taxable income with a Roth conversion? Is my stimulus check taxable?

Listen to find out the answers to all of these questions and more to best take advantage of your tax situation and ensure you’re on track to meet your financial goals.

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• In 2017 the Tax Cut and Jobs Act (TCJA) passed and in 2019 the SECURE Act passed.
  • Important tax information:
    • Current tax rates are set to expire in 2025, if not sooner with a new administration.
    • These thresholds don’t increase as much as inflation likely will. 
    • If you have a regular salary increase, you will slowly creep up your tax bracket allowing for strategic tax planning opportunities.
• Six hidden tax-saving opportunities
  • Standard Deductions
    • You can either take a 1) Standard Deduction for $12,400 if single and $24,800 if married and filing jointly
    • If an itemized deduction exceeds a standard deduction, you are likely to Itemize to save on your taxable income. If your standard deduction is higher than your itemized deduction, you are likely to take the standard deduction.
    • Options: You can bunch your itemized deductions such as charitable giving, medical expenses, etc. 
    • Example: Rather than giving to your charity annually, which may not save you on taxes when looking at whether to take a standard or itemized deduction fits your personal situation best,  you may find that giving your charitable deductions every other year would be a greater benefit. What does this look like? In year one, you would take your standard deduction without giving any charitable contributions. The following year you would give double the amount, allowing you the choice to itemize to lower your tax bill.
  • Prepay Medical Expenses
    • Medical expenses can be itemized, but not just any medical expenses, only expenses that exceed 7.5% in Adjusted Gross Income. If your AGI is $100,000 and your medical expenses exceed $7,500, expenses following that would be deductible.
      • What expenses qualify? Unreimbursed doctor fees, home modifications, long-term care premiums, preventive care, prescription medication, glasses, contacts, hearing aids, etc.
    • Is there a medical expense you know is coming? If you are able to keep within one year, you may have significant tax savings depending on your personal situation.
  • Charitable Giving from an IRA
    • If you are 70 ½ or older, consider giving to your charity directly from an IRA. 
    • Instead of taking the Required Minimum Distribution and having it be taxable to you, you may give money directly to the charity of your choice from your IRA. 
    • When the SECURE Act was passed at the end of 2019, it adjusted the Required Minimum Distribution begin date from 70½ to age 72, but it kept the Qualified Charitable Distribution(QCD) at 70 ½. If you are between 70 ½ and 72, it may make sense to give directly from your IRA to your favorite charity, church, etc.
  • Lower Future Taxable Income with Roth Conversion
    • If your income has decreased and you’re in a lower tax bracket, you may benefit from a Roth conversion.
    • A Roth conversion consists of taking pre-tax dollars(IRA, 401k) and you’re converting that to a Roth IRA. IRAs and 401ks are taxed when you decide to take distributions, whereas Roth IRAs can be withdrawn tax-free.
    • When does this make most sense? 
      • When you have lower taxable income, you want to convert money into after-tax accounts.
      • When tax brackets are low and historically, it is likely lower than they will be in the future.
      • Speak with your Financial Advisor/CPA to plan accordingly for your individual tax situation. 
  • Review Investment Fees
    • An investment fee used to be deductible. You may no longer deduct investment fees, tax preparation fees, etc. 
    • Discuss with your Financial Planner/CPA your after-tax returns to have a greater picture of your financial plan.
  • Optimize Retirement Contributions
    • There are 401(k)s, Brokerage Accounts, Health Savings Accounts(HSA), Roth IRAs, how do you know where is best for you to contribute given your individual situation?
      • If your income is reduced greatly in 2020, perhaps you don’t need to max out your 401(k) as it doesn’t provide as great of a tax benefit? Should you pay off mortgage interest? Are there other things you should focus on other than investment accounts? Every situation is unique and it’s great to do a review annually to ensure you’re maximizing your tax savings.
  • COVID-19 Tax Planning
    • Stimulus check
      • The stimulus check is not taxable. It is an advanced refund of a 2020 Tax Credit.
    • 529 Plan Refunds
      • If you withdrew money from a 529 plan and that expense was refunded, you may want to return that money as a re-contribution within 60 days to ensure it’s not a not taxed or penalized as a non-qualified distribution.
      • If 60 days have already passed, consider using the funds for a computer, books, or other qualified expenses.
    • CARES Act Provisions
      • Previously if you were under age 59 ½ there would be a 10% penalty if you withdraw funds from an IRA or 401(k). 
      • If you withdraw funds before 59 ½, it is still fully taxable, but for this year alone, there will be no 10% penalty. 
      • The income taxes that are due on withdrawals can be spread out over three years and is limited to $100,000.

Timestamps

3:06 – Itemized v. Standard Deductions

5:02 – When does it make most sense to do charitable giving?

6:12 – Prepaying medical expenses

9:23 – Charitable giving from an IRA

11:15 – Roth conversions

12:30 – Tax implications of financial advisor fees

15:40 – Stimulus checks

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