Thursday, November 26, 2020
Home Save Money Personal Finance 4 Strategies to Lower Your Tax Bill in 2020

4 Strategies to Lower Your Tax Bill in 2020

Strategies to Lower Your Tax Bill in 2020

“The hardest thing in the world to understand is the income tax.”Albert Einstein

That is a bold statement coming from a genius who discovered the theory of relatively, but it is a true statement that millions of Americans share every April 15. Although taxes are considered one of the few certainties of life, you can minimize what you send Uncle Sam by understanding the many strategies that are available to lower your tax bill in 2020.

As professional tax planner Carol W. Thompson reminds us, “Planning is the key to taxes. If you don’t plan, then you’re not going to get anywhere.” Thompson also wants clients to understand that in the United States, the federal income tax is not calculated from your gross income, but instead, it is calculated by using credits and deductions to lower your tax bill.

This article first reviews the five time-tested strategies for lowering your tax bill, before listing the most common tax credits and deductions. The remaining section and the most important section of this article details the changes that will lower you tax bill in 2020.



4 Time-Tested Strategies to Lower Your Tax Bill

Before you get year specific by trying to implement strategies to lower your tax bill in 2020, it is important to understand four tax-lowering strategies that work every year.

Maximize IRS Contributions

You understand about the importance of stashing away a healthy amount of cash for retirement. However, feeding your IRS to lower your taxes might not have come up on your personal financial radar.

The money you add to your traditional IRA account is considered by the federal income tax code to be a pre-tax contribution. This means you will pay less in taxes, regardless of whether you decide to take the one-time standard deduction or itemize a list of deductions. Over the past several years, America taxpayers have enjoyed socking away traditional IRA cash and applied the retirement contributions to the income tax calculated for the previous year.

You should know that traditional IRA contributions are considered tax deferred contributions by the United States income tax code, which means you will eventually have to pay taxes during your retirement years. The upside is your retirement income should be much lower than it is now.

Make Charitable Contributions

Charitable contributions represent one of most reliable ways to lower your tax bill in any year. You can write off the checks sent to your favorite charitable organization, as well as the toys, books, clothes, and small appliance you donated to organizations such as Goodwill and the Salvation Army. Any expenses incurred from volunteering can also be used to lower your tax bill in 2020, including the cost of traveling to a seminar or a convention. Thompson suggests bundling charitable contributions as an effective tax lowering strategy. For example, you can deduct the donations you make to the American Red Cross on a quarterly basis and then at the end of the tax year, match the individual contributions with a lump sum donation that represents the charitable contribution you would make to the American Red Cross next year.

Contribute to Employer Sponsored Plans

We are talking about what is referred to as flexible spending plans, which represent pre-tax plans that use tax-exempt money to pay for employer-sponsored benefit programs like health insurance, medical expenses. and dependent care. Your employer deducts a tax-free amount of money from each paycheck and places the deducted funds into the appropriate employee benefit account.

Contributing to an employer sponsored flexible spending account lowers the gross income used to calculate taxes. However, Thompson reminds us of two exceptions to the flexible spending account tax lowering rule. First, you have to pay attention to the “use or lose it” requirement, which means you cannot carry over an unused contribution balance to the next year. Second, you will not be allowed to deduct childcare expenses, if you contribute to a dependent care flexible spending plan.

Spend Like There is No Tomorrow

Well, not in the traditional sense like binge buying at your favorite electronics store. Spending by the end of year to lower your 2020 taxes involves buying stuff you need to operate a home-based business. Think about itemizing the cost of a brand new desktop computer you use for running your own business from home. Make sure the home-based business items purchased for tax lowering purposes are things you really need. Moreover, you can only deduct an annual depreciated amount of a new computer, not the entire amount paid at the electronics store. Thompson also reminds us that you cannot deduct office equipment, if your home is not the primary location where you conduct business.



Tax Credits and Deductions for 2020

There are literally hundreds of tax credits and deductions that you might be able to take. The following personal finance tips for 2020 and beyond cover the most common types of tax credits and deductions. Just remember your itemized tax deductions must exceed the one-time standard deduction to make itemizing tax deductions worth your time and effort.

Child and Dependent Care Credit

Between 20% and 35% up to $3,000 of child day care, as well as for an adult dependent that requires care. You can deduct up to $6,000 for taking care of two or more dependents. The child and dependent care tax credit kicks in to help you defray the costs of child or adult dependent care so you can work.

Student Loan Interest Deduction

One of the most effective ways to invest in yourself involves earning a degree in your chosen field of professional expertise. The United States tax code rewards the achievement of higher education goals by allowing you to deduct up to $2,500 of your taxable income per year for the interest you pay on a student loan.

More Education Tax Incentives

Realizing the importance of encouraging the achievement of advance education goals, the United States Congress passed the American Opportunity Tax Credit (AOTC) into law. The AOTC allows you to claim $2,000 on the money paid to take care of advanced education expenses such as books, tuition, school fees, and education equipment. For the next $2,000 spent on advanced education-related expenses, the AOTC gives you a tax credit of 25%, which brings the entire amount of the ATOC to $2,500.



Child Tax Credit

One of the easiest tax credits to take involves having a child and/or a non-child dependent living in your home. For a child, it is one-time tax credit of $2,000 and for an adult dependent, the tax credit is $500.

Earned Income Tax Credit

Adjusted for inflation, the Earned Income Tax Credit (EITC) in 2020 falls between $538 and $6,600. If you earn less than $57,000 per year, the EITC can take substantial bite out of your federal income tax obligation. The amount of money you can deduct because of the EITC depends on your marital status and the number of children living in your home.

State and Municipal Taxes

The United States federal income tax code permits Americans to deduct up to $10,000 for local property taxes, as well as state and municipal originated sales and income taxes. If you file federal income tax forms separately, the deduction for state and local taxes is $5,000 per return.

Mortgage Interest Deduction

You probably know about some of the ways to enhance the curb appeal of your home, which corresponds to a boost in the value of your home. Did you know you can benefit financially from owning a home by deducting mortgage interest from your federal income taxes? The goal of this tax deduction is to provide Americans with a financial incentive to purchase a home.

Start Your Journey to Financial Freedom!
Get the latest in personal finance, investing, and entrepreneurship delivered straight to your inbox. Join many others and sign up today!


Adoption Credit

In 2020, the tax credit for adopting a child rises from $14,080 to $14,300. The tax credit covers the costs associated with adopting one or more child.

Deduction for Self-employment Expenses

The flourishing self-employment industry caught the attention of the United States Congress. In response, the United States Congress added a tax deduction that allows entrepreneurs to deduct the expenses made for running a business.

Home Office Deduction

If you utilize your home consistently as a place to perform work-related activities, you might qualify for the home office deduction. This deduction allows you to lower your tax bills by subtracting the cost of rent, utilities, and maintenance from your federal income tax bill.

Residential Energy Credit

The growing movement towards using clean, sustainable energy sources has created the residential energy credit. You can remove from your tax income tax burden up to 30% of the cost for installing a solar energy system. This includes the cost of adding solar panels and a solar water heater.

Deduction for Educator Expenses

Many teachers dig deep into their pockets to pay for classroom teaching tools and equipment. The United States federal income tax code permits educators to deduct up to $250 per year for the money spent on classroom supplies.



6 Reasons Why Federal Income Taxes Will Decline in 2020

With the 2019 tax year coming to an end, the focus shifts from the tax breaks granted by federal law for 2019 to the new and modified tax breaks that will lower your tax bill in 2020. In addition to the dollar amount changes that pertain to tax credit and deductions, the United States Congress also has changed other elements of the American tax code that lowers the amount of money paid for federal income taxes.

No More Healthcare Mandate

It is tough to save money, when the federal government constantly takes a dip into your pockets. One of the most bothersome federal financial intrusions occurred when Congress enacted the Affordable Care Act. Tucked inside of the bill was language that made Americans pay an individual mandate penalty for not getting health insurance coverage by a certain date. In 2020, the costly individual mandate penalty disappears from your federal income tax liability.

Higher Tax-free Deductions for Retirement Plans

Saving money for a rainy day is one of the most important personal financial decision you will ever make. Another saving strategy is to tuck away plenty of cash to enjoy a prolonged and prosperous retirement. For years, the United States federal income tax code has encouraged taxpayers to stash away cash for retirement by allowing for a deduction for retirement plan contributions. For 2020, the contribution deduction for a 401k rises by $500 to $19,000. The base deduction for an IRA contribution increases from $5,500 in 2019 to $6,000 in 2020.

Higher Health Savings Account Contribution Limits

Health savings accounts (HAS) represent another account that increases the contribution limits from year to year. The goal of HSAs is to motivate Americans to save for the proverbial rainy day for handling medical expenses. In 2020, an individual with health coverage can deduct $3,550, which represents a $50 increase from the 2019 maximum deduction for contributions to an HSA. The family coverage contribution for an HAS in 2020 is $7,100.



Deduct More Medical Expenses in 2020

Have you ever wondered how millionaires earn their money? Of course, some of it has to do with knowing how to generate income. However, most millionaires understand how to maximize tax breaks, as is the case by deducting more medical expenses in 2020 from the federal income tax bill. The Tax Cuts and Jobs Act of 2017 reduced the threshold for deducting medical expenses from 10% to 7.5% of your gross income. Many American taxpayers are unaware of this highly beneficial tax deduction for 2020.

Higher Standard Deductions

Every year, the United States Tax Code bumps up several standard deductions. In 2020, the standard deduction for a married taxpayer filing separately increases from $12,200 to $12,400. Married couples filing a federal income tax return jointly enjoy a rise in the standard deduction to $24,800, which is a $400 rise in tax savings from 2019. There are also standard deduction increases in 2020 for taxpayers that are single and taxpayers that file as the head of a household.

Gifts and Inheritances

As the most dramatic change to the United States federal income tax code in more than 30 years, the Tax Cuts and Jobs Act is set to expire in 2025. The monumental tax reform law doubled the amount a decedent can gift over a lifetime to avoid the costly gift tax of 40%. For 2020, the lifetime gift and estate tax exemption will jump from $11.4 million to $11.58 million for each individual. However, the annual gift exclusion for 2020 will remain the same at $15,000. The annual gift exclusion is the amount of money you can give to another person, without the gift counting against your lifetime exemption.

The income tax might confuse a genius such as Albert Einstein. However, you do not have to discover the theory of relativity to understand the strategies to lower your tax bill in 2020.



Avatar
Don't Work Another Day Staff
Keeping you informed about the latest in personal finance, investing, and more!

LEAVE A REPLY

Please enter your comment!
Please enter your name here