End of Year Planning: Set Goals and Reduce Taxes
By the last third of the calendar year, you’re likely to have a pretty good idea of what your annual income will be and whether any major expenses or big life changes await you. This can allow you to engage in more robust tax planning, creating the first draft of your federal and state income tax returns to see what factors you can tweak and what goals you can set to reduce your overall tax burden. Read on for some points to consider as you close out 2020. Maximize Your Retirement Savings By knowing your adjusted gross income (AGI) and top marginal tax rate, you’re better able to maximize the impact of your retirement contributions based solely on their tax status. Contributing to a traditional IRA or 401(k) can help reduce the amount of your gross income that is subject to tax, while contributing to a Roth IRA or 401(k) can allow you to pay taxes now and benefit from tax-free growth later. By early fall, you should also have a better idea of whether you’ll come close to the income limits for traditional or Roth IRA contributions. In some cases, it may make sense to push off irregular compensation like bonuses or stock payouts into the next calendar year (if you can) if receiving these funds in 2020 will cause you to phase out of certain tax benefits. Investigate a Roth or Backdoor Roth The Tax Cuts and Jobs Act of 2017 expires in 2026, and many expect tax rates to increase significantly by then. Contributing to a Roth IRA directly (or through a “backdoor Roth” conversion) can allow these funds to be taxed at today’s lower rate and