Looking to Reduce Your Tax Liability? Hire a Florida Financial Advisor
You have probably heard of the famous saying which implies that nothing in this world is certain except death and taxes. In other words, when you try to build your wealth, you will have to pay taxes on each one of your income sources, including your investments. None of us, however, wants to pay more in taxes than we have to.
This is why tax efficiency should be a part of your financial planning and wealth building. Unfortunately, understanding taxes and the various ways of lowering liability can often leave you perplexed. No one likes to spend hours poring through thick tax law books, amendments, court rulings, and legal interpretations.
That’s where a financial advisor can help you. A skilled financial advisor can help you consider your future tax liabilities and plan your wealth-building accordingly. While tax reduction steps will change depending on your income and where you live, a financial advisor will discuss one of the following strategies.
1. Contribute to Your Tax-Deferred Retirement Plans
One of the most common ways to reduce tax is to contribute as much you can to your tax-deferred retirement plans such as a 401(k), a Thrift Savings Plan, most 457 plans, or a 403b account. Pre-tax contributions to these employer-sponsored retirement plans can help you reduce your total taxable income for the year.
Depending on your income level, it may be the best way to lower your taxes for the year. Furthermore, it will also help you put aside money for your retirement. Your lower taxable income may make you eligible for other tax benefits.
The Internal Revenue Service (IRS) has increased the contribution limit to these plans from $19,000 to $19,500 for 2020. The catch-up contribution limit for employees aged 50 and over who participate in these plans is now $6,500 for 2020. That’s $500 up from $6,000 in 2019.
2. Harvest Your Investment Losses
If you have made investments and suffered losses on a few of them, you can use this option to save tax. You may have heard about this strategy, commonly called tax-loss harvesting. As an investor, you are allowed to write-off your investment losses against your taxable capital investment gains or other income.
Currently, the write-off limit for tax-loss harvesting is $3000. However, you can carry forward the remaining losses, if any, to the next year and beyond for tax reductions.
You will, of course, need to start by calculating the estimated capital gains and losses for the taxable year. Next, you will need to sell the assets with unrealized capital losses to get the maximum write-off.
However, as with any other tax rule, there are exceptions to this law as well. That’s why you should consult an experienced Florida financial advisor. They can help you understand if tax-loss harvesting is the right option for you.
3. Make Charitable Contributions and Donations
Charitable donations are another way to reduce taxes on your income. You can use this method in a variety of ways. For example, the conventional way of donating to qualified charitable organizations in the form of cash or goods can help you get deductions on your tax return. However, any donations above $250 will require a receipt to make it eligible for a tax deduction.
Alternatively, you can consider donating highly-appreciated stocks and securities to charity to get a charitable deduction, and also avoid taxes on capital gains as an added tax benefit. If you make these donations to donor-advised funds, the IRS offers an immediate charitable deduction as per the fair market value of the asset.
The ceiling limit for these deductions is up to 30% of your Adjusted Gross Income (AGI). You can carry forward the donations exceeding this limit for the next five years. Your financial advisor can help you set up donor-advised funds.
4. Take Advantage of Your Health Savings Account (HSA)
This is a unique tax-exempted saving account created to provide for health care expenses. If you have a high-deductible health plan, HSA contributions should help you earn tax deductions. Although your employer will provide you with an HSA, you can also start it on your own.
While the contributions to an HSA are tax-deductible, you can make tax-free withdrawals, provided they are for IRS-qualified medical expenses.
The qualified expenses include almost all mainline medical treatments and processes, along with prescriptions. You can also carry forward excess contributions to your HSA indefinitely for future tax deductions. Furthermore, you earn interest on the savings account, which is also tax-free.
In 2020, if you have individual high-deductible health coverage for yourself, you can contribute up to $3,550 to your HSA. The same limit increases to $7,100 for a family high-deductible coverage. The annual out-of-pocket expenses for a high-deductible health plan are $6,900 for self-only plans and $13,800 for family coverage.
5. Start Saving for Junior’s College Education
Another great way to reduce taxes is to start saving for your child’s college education. One of the most popular options is a 529 plan, which offers tax and financial aid benefits. You can use this plan to pay for college costs at any qualified college across the country.
However, these are state government-sponsored plans. So, you won’t be able to get deductions contributions on your federal income taxes, but you can get the benefits on your state tax returns. Another added advantage is that you can contribute to not just your own state’s plan, but any state 529 plan.
There are two types of 529 plans, prepaid tuition plans and education savings plans, with most states offering at least one of them. You will need to check with your financial advisor or accountant to see which plan is more suitable for you and the tax benefits you can get on contributions and withdrawals.
As you can see, there are different ways to reduce your tax liability in this financial year and beyond. While these are a few common tips to reduce your tax liability, your financial advisor may help you choose better options and customized plans depending on your income, expenses, investments, and financial goals. The bottom line is, don’t leave your tax planning to the last minute. Our financial advisors are here to help you.