Year End Tax Planning | Things You Can Do Before the Year is out to Reduce Your Income Tax Liability

We’re getting towards that time of year, again, where the end of the year is upon us and we want to make sure that we’ve done the right things throughout the year to put more money in our pocket, less money in Uncle Sam’s, and a lot of these tips we’re going to go through today can help you do just that.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) and host of The Retirement Income show.

So when we talk about saving taxes, it’s not always put more money in my pocket today. A lot of times, we need to be looking out over the next 10, 15, 20, 30, 40 years to make sure we’re keeping more money in our pocket over time. So some of these tips will help you save money today, and some of these will help you save money over the course of time, but these are things that we need to be doing every single year, and make sure that we’re staying on top of what’s available to us when it comes to tax planning.

So I’m going to start out with some basic things here. Okay, so Roth IRA contributions first. Remember, the Roth IRA, everything we put into this account, it’ll grow tax free forever, and we can take that money out tax free forever.

We have what’s called a phase out range here, if your income falls between this phase out range, you can only make a partial contribution. This is going to be the same for the first few things we look at here.

If you make less than 124, and you’re single, you can make a full contribution, which if you’re younger than 50, $6,000 per year, if you’re greater than or equal to 50, 7,000 per year. If you’re married filing jointly, income less than 196, then you can make a full contribution to the Roth IRA. If it falls between the phase out range, it’s a partial contribution. Work with a tax advisor, you could also learn to calculate this online.

If you make more than 206, you cannot make a Roth IRA contribution if you’re married and more than 139 if you’re single, no Roth IRA contribution for you.

Next is your IRA contribution. So this is money when we put into our retirement account, not the 401k, not your 403b, but outside your workplace, your individual retirement account, you can take a tax deduction for making that contribution.

The limits are the same, 6000 if you’re younger than 50, 7,000 if you’re 50 or older, but the phase out ranges are different. So if you make less than 65,000 and you’re single, you can put the full contribution in. If you’re in between this range, it’s a partial contribution, and if you make more than 75,000, you cannot make an IRA deductible contribution. And if you’re married, here’s the range.

Now, this is a great tax tip that most people aren’t aware of. It’s a spousal IRA contribution. In order to make a contribution to any type of retirement account, you have to have earned income, which means you need to be working. But oftentimes one spouse is working, the other is not. Well, there is something called a spousal IRA and we can make a contribution on behalf of our spouse, take a tax deduction for that contribution, which lowers your tax bill today.

So if your spouse is not working, and you do not have a workplace plan, this is a 401k, a 403B, some type of retirement plan at your place of employment, and your income is between 196 to 206, this is the phase out range, you can make a partial contribution, which again is 6000 per spouse if you’re younger than 50, or 7000 per spouse if you’re 50 or greater.

So if you make less than 196, you can do a spousal contribution. If you make more than 206, you’re out of luck, you cannot do a spousal IRA contribution. This simply is based on if you have a

401K or a 403b, any type of workplace plan.

If you do have a plan, then the contribution limits are less, or excuse me, the phase out limits are less. So if you make less than 104 and you do have a workplace plan, you can still do a spousal IRA contribution of 6000 or 7000, depending on your age. If you have a workplace plan and you make more than 124, you cannot make a spousal IRA contribution to lower your taxes.

Most people overlook this, this is a big one that could save you a decent amount of money on your taxes this year.

Now, if you do not qualify for any of the above, you could do a backdoor Roth contribution. So a backdoor Roth contribution means you make too much money to contribute to a Roth. How to do the backdoor Roth is pretty straightforward. You open up an IRA, you make a contribution to a traditional IRA, but you do not get the tax deduction because your income is greater than the threshold that allows you to take that deduction, which if you are single and you make more than 139,000, you could do a backdoor Roth. If you’re married and make more than 206, you can do a backdoor Roth. Open up an IRA, make the contribution, 6000 if you’re younger than 50 ,7,000 if you’re 50 or older, and then immediately transfer it to a Roth IRA.

There will be no taxes owed on that conversion, but you will pay taxes on the income that you earn that year that goes in to the IRA initially. I have a video on the backdoor Roth on the YouTube channel, lots of information on the internet as well. Backdoor Roth contribution, not going to help you save taxes today, but it will help you save taxes over the course of time by getting money into this tax free environment to grow forever.

Capital gains. Now if you are married, filing jointly, and you have taxable income, so this is after your deductions of $80,000 or less, you pay 0% on your dividends and capital gains. So now that we’re at the year end, let’s say you have taxable income right now of $50,000. You could sell some of your positions at capital gains and pay 0% tax on those gains. We have a big senate runoff coming in Georgia in the upcoming January year, in 2021. This one could completely go away as far as the ability to have 0% capital gains tax, 0% dividend tax. You probably need to work with a financial planner who understands these rules or talk to your CPA, but you have the opportunity to take some gains, pay 0% tax, and these are the thresholds. If you’re married, taxable income, not adjusted gross income, or gross income, taxable income 80,000 married, 40,000 single.

I put an asterisk down here by the short term losses, it’s important to keep in mind that short term losses inside your investment account are more valuable than long term losses. And the reason is, short term losses can be used up to 3000 per year to offset ordinary income. You can’t use long term losses to offset income and income tax rates are higher for most people than investment tax rates. So take your short term losses in your non IRA accounts, up to $3,000 can be used to offset income, which could potentially help you save taxes.

After tax contributions to your 401k. Most people think that the most we can put into our 401k is 19,500, if you’re younger than 50, or 26,000 if you’re over 50. Well, that’s not true. That is the maximum amount you can deduct based on those ages, but you can actually put up to $57,000 into your 401k if you’re younger than 50 and 63500 if you’re greater than 50.

So if you put the deductible part in 19,500 or 26,000, depending on your age, you can still put more money in. Now why would you do this? Because when you retire, you can take all of those after tax contributions, which is the difference between the deductible portion and the amount you put in, you can take all of those contributions and roll them into a Roth IRA upon leaving your work or retirement.

So if you’re over 50, you could put 63,500 in, you only get a deduction for 26,000, but that’s an extra $37,500 you can put into your 401k then roll into a Roth, which is if we look at the Roth IRA contribution limits at 7000 per year, that’s five years of Roth IRA contributions in one single year inside your 401k by using this after tax contribution rule to get more money into that account ultimately to put into your Roth IRA.

Your charitable deductions. Consider bunching your charitable deductions if you are someone who is inclined to give charitable contributions. So how this works, we do have a cap on state and local taxes. So this is your property tax, this is sales tax, this is anything that you’ve paid state and locally in taxes, we have a $10,000 limit. You bunch your charitable contributions for two years into one year. If you have mortgage interest, any other itemized deductions, if all of these add up to be greater than your standard deduction, which is 24,800 if you’re married, 12,400 if you’re single, you can create a larger tax deduction, which will reduce your income and help you pay less taxes.

So, again, feel free talk with a CPA here, talk with somebody who understands the tax code and understands your personal situation. If you don’t have anyone to help you understand these feel free to reach out to us through the website, give us a call. This is something that when we’re looking at making tax planning and financial decisions we need to be saving as much money as possible. So a bunch of tax saving tips here. I ran through it really quickly because I didn’t want this to be a 30 minute video, but go back, look at them, do your own research, reach out to someone that can help you figure this out and put more money in your pocket.

So hit the like button, hit the subscribe button and share this video with a friend or family member so we can help them stay more connected to their money and pay less taxes at the year end here.