It’s the last quarter of the year, and you’re prepping for the holiday season. The last three months of the year are a great time to employ some end-of-year tax planning strategies so you can optimize your return and lower your income tax liability. LongSchaefer explains in today’s blog.
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Know Which Deduction to Take
Before you make any firm tax planning decisions, you need to determine which deduction to take. The standard deduction is a set amount by which the IRS reduces your income liability. Amounts of the standard deduction vary, depending on if you’re filing as a single person, married and filing jointly, or submitting your taxes as the head of a household.
It makes sense to itemize deductions if your total annual deduction will be greater than the standard tax deduction. Common itemized deductions include interest on mortgage payments, certain healthcare expenses, and charitable contributions.
Contribute to Retirement Accounts
Contributions to retirement accounts are a tried-and-true tax deduction that individuals and businesses can make for tax planning purposes. That’s because the annual contribution limits for these plans are $19,500, as of 2020. Those limits may go up in the coming years.
Do you have any extra income in savings heading into the end of the year? Have you lagged in your contributions to IRAs and 401(k) plans? As you decide how best to invest your money at the end of the year, contributions to retirement plans can defer taxes until you use the money for your retirement.
If you’re 40 and you want to retire at 70, you can put off paying income taxes on those contributions for 30 years. Suppose you put the maximum amount, $19,500, into your retirement account by the end of 2020. That reduces the income used to figure your tax liability by $19,500.
Leverage Stock Losses to Offset Capital Gains
The stock market took a beating in 2020 due to the COVID-19 pandemic. Although the stock market has climbed back up, you can deduct up to $1,500 ($3,000 if filing a joint return) of capital losses in excess of capital gains per year from your ordinary income. Although this isn’t as great as contributing to a retirement account, these smaller deductions add up when it comes to tax planning and reducing your income tax liability every year.
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Tax Planning Services From LongSchaefer
The tax and accounting pros at LongSchaefer can tailor a tax planning strategy to your specific situation. We recognize that everyone’s definition of success is different. Contact us or call (513) 245-0300 for more information on our tax planning services and end-of-year tax strategies.