Believe it or not, we’re about three months from the end of the (calendar) tax year. However, there’s still time to lower your 2020 taxes. Here are some commonly used approaches to reducing taxes.
Lower Your Income via a Tax-Deferred Savings Plan
Tax-deferred savings plans let you reduce your Adjusted Gross Income by the amount that you contribute AND they help you prepare for retirement. The most common savings plans are 401(k)s and traditional IRAs. You can check out an article on this that I wrote back in March. Briefly stated, you can reduce your income by the amount you contribute — subject to contribution limits, your current age and, in the case of IRAs, income levels. A bonus is that the growth on these investments is also tax-deferred until withdrawals begin (usually in retirement).
Find Deductions
Tax deductions reduce the amount of income used to calculate your taxes. Some common deductions for working individuals include: mortgage interest, student loan interest, medical expenses, state and local taxes, Health Savings Account contributions and charitable contributions as well as the tax-deferred savings plans discussed above.
Utilize Tax Credits
Tax credits reduce the taxes you owe. Interestingly, they actually have a bigger dollar-for-dollar effect on your tax bill than deductions do. Some common tax credits for working individuals include: child tax credit, child and dependent care credit, earned income tax credit (for those with low or moderate income), savers credit (for those who make retirement plan or IRA contributions and have low or moderate income), plug-in electric vehicle credit and residential energy credit (solar panels) among others.
Watch for Break-Points in Tax Brackets
You probably know that we use a progressive tax system which means that your income is divided into buckets that are taxed at increasingly higher rates. For 2020, the tax rates are as follows for couples who file jointly.
| Tax Rate | Income Range | |
| 10% | $0 to $19,750 | |
| 12% | $19,751 to $80,250 | |
| 22% | $80,251 to $171,050 | |
| 24% | $171,051 to $326,600 | |
| 32% | $326,601 to $414,700 | |
| 35% | $414,701 to $622,05 | |
| 37% | $622,051 or more |
So, if your taxable income (income after deductions and credits) turns out to be $85,000 in 2020, the tax on the first $19,750 is $1,975. The income on the next bracket is $7,260. And the tax on the remaining $4,749 of your taxable income is $1,045. So, it would be good to avoid the higher tax rate on the $4,749 if possible. One strategy is to move that income into next year if possible (called income shifting). To do this, some people are able to defer salary and or bonus payments until the following year. In addition to income shifting, you could revisit your deductions and tax credits. Have you contributed the maximum permissible amount to your 401(k) and IRA? Does your employer offer Flexible Spending Accounts and, if so, have you maxed that out? If you’re itemizing, have you considered increasing your charitable contributions? If you’re unable to itemize this year, you might consider “bunching” your charitable contributions into an every-other-year schedule.
Many of us are facing financial challenges due to the pandemic. Minimizing taxes is one good way of keeping money in your pocket. We’re available to discuss your tax situation or any other financial matters in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.