The start of the year means tax season…but it is also the season to look back on 2019 and plan ahead for the coming year. With the right approach, you may be able to reduce your tax bill for the 2020 tax year! And with the recent passing of the SECURE Act, there are a few changes you need to know about.
Our role at Halpern Financial is to look at the big picture to make sure all areas of your finances fit together. Tax efficiency is an important part of that! However, we are not CPAs, and we do recommend that you reach out to your tax professional before taking any action to ensure it is a good idea for your individual situation.
A few ways to make 2020 less taxing:
Contribute to your pre-tax retirement accounts.
The limits to most types of tax-deferred accounts increased for 2020. This means you can put away more than last year and reduce your taxable income up to the following maximum contributions. Note that if both spouses are working, you may be able to contribute the maximum amount for each person, so the family benefits from even more income tax deferral.
- 401(k): The maximum contribution increased from $19,000 to $19,500. If you are over age 50, your catch-up contribution increased from $6000 to $6500. This means savers over 50 can make a maximum 401(k) contribution of $26,000.
- Profit Sharing Plan: The maximum contribution limit increased from $56,000 to $57,000.
- Defined Contribution Plans: The maximum contribution increased from $56,000 to $57,000 (or ($63,500 with catch-up)
- Health Savings Accounts: The maximum contribution increased from $3500 to $3550 for individuals, and from $7000 to $7100 for families. There is also a $1000 catch-up if you are over age 55. HSAs are interesting tools—they can be used to partially self-fund your long-term care. It can be difficult to qualify for Long-Term Care insurance once you have a medical issue, so if you have an eligible high-deductible healthcare plan, consider using an HSA to fund some of your future healthcare.
Save on state taxes with 529 Plans.
If you have children or grandchildren and would like to contribute to their college fund, we usually recommend contributing to your state-sponsored 529 Plan. In addition to being a tax-free way to invest money for college and K-12 expenses, many states will offer a tax deduction for contributions. Some states have a limit on this and others have particular strategies to take advantage of the maximum tax deduction.
Meet with your tax preparer in 2020 before the end of the calendar year!
Make sure you are paying enough in taxes throughout the year so you are not surprised by a large tax bill (or worse, any penalties due) for 2020. On the flip side, you don’t want to withhold more than necessary because this amounts to lending money to the IRS interest-free!
Steer clear of avoidable tax bills. If you know you will need a lump sum of cash in the near future, try to build up your cash reserves rather than pulling from investments that will initiate capital gains. If you do need to pull from investments, then make us aware and we can secure the proper share lots to minimize this exposure.
Tax-Related Changes in 2020 to Know About:
The SECURE Act has eliminated Stretch IRAs.
This can result in a very large tax bill for your heirs—so if Stretch IRAs or Inherited IRAs are a part of your estate plan, make sure to meet with your estate attorney in 2020.
The SECURE Act changed the Required Minimum Distribution age from 70 ½ to 72.
If you are turning 70 ½ this year, you will not have to take a required minimum distribution from your tax-deferred accounts and you now have extra time to manage your taxable income if you are on the edge of a higher tax bracket. If you plan on working past age 70 ½, you can continue to contribute to these accounts.
If Roth conversions are part of your strategy, you may need to adjust.
If the beneficiary of your IRA account is not your spouse, talk to us about whether a Roth conversion makes sense. It is more important than ever to manage your income to avoid being pushed into a higher tax bracket unintentionally.
The Social Security wage base went up.
The Social Security wage base increased from $132,900 to $137,700—a difference of $4800. This means an additional $4800 is subject to the 6.2% Social Security tax, amounting to an additional tax cost of $297.60. This impacts anyone making up to $137,700. No additional Social Security taxes are due on income past that cap.
As always, please feel free to reach out with any questions about the above changes and strategies for 2020. We are happy to coordinate with your CPA to ensure your investment and tax plan fits together seamlessly.