There is still time to potentially reduce your 2020 federal income taxes, but you'll need to act soon. There are several tax minimization strategies for individuals including timing your income and deductions,making the most of your retirement and health savings accounts, being smart about charitable donations, keeping taxes to a minimum on the investments in your taxable accounts, and minimizing taxes on your estate and inherited retirement accounts. Many of these strategies need to be completed by the end of the year to be effective, and not all of the strategies may be appropriate for you. Over the next few weeks, we'll take a look at each of these strategies in depth. Today, we'll start with timing your income and deductions.
Please note that this post reflects the laws in place as of September 1, 2020. Changes before the end of the year are a possibility.
Timing your Income and Deductions
Many tax planning strategies involve timing. For instance, you may be able to defer some tax until next year by postponing the receipt of some income until next year and paying some of next year's deductible expenses this year. The benefit of deferring tax is that you gain another year to use or invest the money you otherwise would have paid in taxes this year.
But before postponing or accelerating anything, it is important to consider whether your financial situation may be different next year. If you expect to be in a higher tax bracket next year, you may find it more beneficial to accelerate income into this year so that it is taxed at a lower rate and to postpone paying deductible expenses until next year when your deductions will be worth more to you. Using this strategy may help reduce your total taxes over the two-year period.
There are several ways to time income and deductions. For example, to postpone the receipt of income, you might wait until next year to sell appreciated assets or to make taxable withdrawals from your tax-deferred retirement accounts. If you itemize deductions, you may be able to accelerate some deductions into this year by making deductible contributions to charity this year that you planned to make next year or by paying some deductible expenses early, such as paying your 2021 property taxes in 2020.
Please note that timing income and deductions can sometimes have unintended consequences, such as boosting your income to a degree that you are no longer eligible for certain tax breaks with income limits. To help avoid unintended consequences, consult our professionals before timing your income and deductions.