With tax season approaching, individual tax planning should also be starting. Election years always make tax planning a little more difficult with potential rule changes, but here we look at a few items to keep an eye on when it comes to your 2020 taxes.
Tax Loss Harvesting
If you have investments that are now valued at less than the price you purchased them for, considering selling these investments could help you in the long run. The sale of these investments would result in capital losses, and can offset any capital gains that you may have. If capital losses are in excess of capital gains, the excess amount can then be used to offset up to $3,000 of your ordinary income, and as a result decrease your tax liability.
While charitable contributions help to increase your itemized deductions every year, COVID-19 and this pandemic have created an opportunity for contributions to help your tax liability even more. This year, regardless if you itemize or take the standard deduction, the CARES Act for COVID relief has enacted a $300 tax deduction for cash contributions to charity. With how difficult this pandemic has been for everyone, this is a great opportunity to help charities and people in need all while helping to decrease your tax bill.
401k and SEP Contributions
Contributions to a 401k or SEP help to reduce taxable income, so maximizing these contributions is always helpful. The maximum contribution to a 401k this year has increased from $19,000 to $19,500, and if you are an employee who is 50 or older, an additional contribution of $6,500 can be made as well.
The CARES Act has also made some changes to the handling of retirement funds. Under this bill, if an individual is under 59.5 years old, was diagnosed with COVID-19, or if their job was financially affected due to a shutdown/quarantine, they can take up to $100,000 out of their 401k, IRA, or pension plan without receiving the 10% penalty for early distribution. This draw would then be treated as income that gets taxed over the next 3 years, but withdrawal amounts can also be re-contributed at any time in those 3 years to eliminate taxable income amounts.