Improving Your Tax Savings This Year

Early November is a good time to make a checklist and see if you’re doing all you can to reduce your taxes.

1. DUMP LOSING INVESTMENTS

Tax-loss harvesting is a strategy in which you rack up losses in a taxable brokerage account by selling holdings that have declined in value.

You can then use these losses to offset capital gains stemming from appreciated positions you’ve sold. If your losses exceed your gains, you can apply up to $3,000 a year to offset ordinary income.

Don’t just sit on the cash proceeds you get back from selling your losers.

Work with your financial advisor to redeploy the money and rebalance your portfolio, said Hollmann.

Avoid violating the wash sale rule, which bars you from deducting the loss if you’ve sold the position at a loss and bought back substantially identical stock or securities within 30 days.

This rule applies to all the accounts in your household. Say you sold the loser in your taxable account, but bought it back in your 401(k) plan. You’ve violated the rule. 

You’ve also violated the rule if you drop the position in your taxable account, but your spouse buys it in his or her account.

2. LOW TAX BRACKET? OFFLOAD SOME WINNERS

Selling a winning position in your taxable brokerage account might seem counterintuitive.

Here’s why it could make sense: Capital gains and the taxes you pay are based on the difference between your cost basis — what you paid for the asset — and its appreciation at sale.

The bigger the difference between the cost basis and the appreciation, the heftier the capital gain and the higher the tax you pay when you sell the position.

By selling the investment and buying it back at a higher price, you’ve reset your cost basis to a higher level. If you sell it when your tax bracket is especially low, you’re doing it with 0% tax on the appreciation.

The icing on the cake is that the wash-sale rule doesn’t apply to selling winners. That means you can sell your asset, take the gains off the table and repurchase it shortly after.

3. CONVERT TO A ROTH IRA

Households that took a hit to their income this year might be well positioned to convert a portion of their traditional individual retirement account to a Roth IRA.

Roth IRAs come with a bevy of tax advantages: You put after-tax dollars into these accounts, where they accumulate tax-free. At retirement, they’re a source of tax-free income.

Since savers pay taxes on the traditional IRA sums that are converted, the prime time to do it might be now, particularly if they’re dealing with reduced income and dented account values.            

Do it if you can and if you have the funds to pay the taxes, especially if the values are depressed.

4. DONATE INTELLIGENTLY

Generosity pays during tax time. The CARES Act created two tax incentives to boost cash donations.

First, there’s a $300 tax deduction donors can claim for giving cash to charity — even if they take standard deductions when they file taxes.

Second, donors who itemize deductions when they file can grab a heftier tax break for cash donations for 2020 only.          

This break allows these taxpayers to deduct up to 100% of their adjusted gross income for cash donations to public charities. Normally, you can only claim up to 60% of your AGI for a charitable donation.

There are limits on which entities can receive the cash contribution under the CARES Act. For instance, you can’t take a 100% deduction for contributing cash to your donor-advised fund.

 “You may have to talk with your CPA on which option makes sense,” Cherill said.

Talk to your tax professional before you move forward. While the CARES Act is rewarding hefty cash donations, the smarter tax play may be to give appreciated stock to your favorite charity instead.

5. WORKING REMOTELY? HEAD OFF SURPRISE TAXES

Hiding out from the pandemic in a different state? Talk to your accountant and your payroll department about what that may mean for your taxes.

It’s one thing if you were spending a week or two with family, but if you’ve spent months working remotely from another state, you may have a tax obligation there.

In that case, you could end up facing a tax liability in both your home state and the locale where you’ve been crashing since the pandemic started.

It doesn’t matter if you weren’t home in New York; you’re going to file there and report income there.

States can mitigate the effect of double-taxation by offering a credit to filers — or by adopting reciprocity agreements with other locales.

Your payroll department should be aware of where you’re working and where you may have to pay tax.

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Source: CNBC