As the year comes to an end, it’s important to review your current tax situation and consider any options you may have to make the most your 2020 return. Here are a few essential yearend tax planning strategies to consider to maximize your tax savings opportunities for 2020 and beyond.
Maximize Retirement Contributions
If it makes sense financially, consider maximizing your retirement plan contributions. Every dollar you are eligible to place into 401(k) plans, 403(b) plans, Traditional IRAs, and SEP IRAs reduces taxable income and allows your pre-tax contributions to grow tax-deferred until you begin withdrawing them as income in retirement.
– The 2020 contribution limit for IRAs is $6,000 (1) ($7,000 if over 50). Deadline to contribute is the tax filing deadline on April 15th, 2021.
– If you contribute to a 401(k) plan, the 2020 contribution limit is $19,500 ($26,000 if you are over 50). Deadline to contribute to your 401(k) is December 31st, 2020 and contributions need to be made through salary deferrals. This also applies to 403(b) plans.
– For SEP IRA plans, employers cannot contribute more than 25% of an employee’s compensation, or $57,000 in 2020. (2) Deadline to contribute to a SEP IRA can be as late the due date of the return, including valid extensions.
Contribution limits in 2021 remain the same for IRA’s and 401(k)s, and increase slightly for SEP IRA’s to $58,000. There are also income phase out limits to consider when contributing to IRAs.
Review Your Tax Strategy With Your Tax Professional And Financial Advisor
Make sure to consult your tax professional and financial advisor to discuss your tax strategy for 2020 and beyond. Investors often wonder why they should consult both CPAs and financial advisors on tax strategies. Generally, CPAs tend to focus on what’s happened in the past, while a financial advisor’s role is to prepare you for the future. Consulting both will help you put together a well-rounded strategy for your tax planning. In order to ensure you are prepared for 2021, consider taking the following actions before year-end:
- Review notable tax law changes for 2021 that may affect you.
- Review your capital gains and losses.
- Review your retirement savings options.
- Consider Roth IRA conversions.
- Consider additional year-end tax strategies.
- Understand potential tax law proposals.
- Review your tax strategies with a tax preparer.
Additionally, it may be beneficial for you to review the following items specifically as you assess your tax strategy for 2020 with your financial advisor and tax preparer:
Decide whether to take the standardized or itemized deductions.
Analyze the numbers for your specific situation to see if it is more beneficial to take the standardized deduction or utilize itemized deductions.
Consider bunching your charitable donations or using a donor-advised fund.
If you make charitable donations, it may be beneficial to consolidate them into targeted years or utilize a donor-advised fund.
Review your home equity debt interest.
You may qualify for a deduction based on the interest owed on your mortgage. The law has also changed when home equity interest qualifies for a deduction.
Revisit the use of any qualified tuition plans you utilize.
If you use a qualified tuition plan, such as a 529, make sure you are making contributions optimized to your personal tax strategy.
If applicable, maximize your qualified business income deduction.
If you have ownership in a business, you may qualify for a deduction of up to 20% of your qualified business income.
2020 & 2021 Tax Brackets
Understand the tax bracket you are in by reviewing the 2020 and 2021 tax brackets below:
2020
| Tax Rate | Single | Married/Joint & Widow(er) | Married Filing Separately | Head of Household |
| 10% | $0 – $9,875 | $0 – $19,750 | $0 – $9,875 | $0 – $14,100 |
| 12% | $9,876 – $40,125 | $19,751 – $80,250 | $9,876 – $40,125 | $14,101 – $53,700 |
| 22% | $40,126 – $85,525 | $80,251 – $171,050 | $40,126 – $85,525 | $53,701 – $85,500 |
| 24% | $85,526 – $163,300 | $171,051 – $326,600 | $85,526 – $163,300 | $85,501 – $163,300 |
| 32% | $163,301 – $207,350 | $326,601 – $414,700 | $163,301 – $207,350 | $163,301 – $207,350 |
| 35% | $207,351 – $518,400 | $414,701 – $622,050 | $207,351 – $311,025 | $207,351 – $518,400 |
| 37% | $518,401 or more | $622,051 or more | $311,026 or more | $518,401 or more |
2021
| Tax Rate | Single | Married/Joint & Widow(er) | Married Filing Separately | Head of Household |
| 10% | $0 – $9,950 | $0 – $19,900 | $0 – $9,950 | $0 – $14,200 |
| 12% | $9,951 – $40,525 | $19,901 – $81,050 | $9,951 – $40,525 | $14,201 – $54,200 |
| 22% | $40,526 – $86,375 | $81,051 – $172,750 | $40,526 – $86,375 | $54,201 – $86,350 |
| 24% | $86,376 – $164,925 | $172,751 – $329,850 | $86,376 – $164,925 | $86,351 – $164,900 |
| 32% | $164,926 – $209,425 | $329,851 – $418,850 | $164,926 – $209,425 | $164,901 – $209,400 |
| 35% | $209,426 – $523,600 | $418,851 – $628,300 | $209,426 – $314,150 | $209,401 – $523,600 |
| 37% | $523,601 or more | $628,301 or more | $314,151 or more | $523,601 or more |
Get Your Questions Answered Today
Have more questions about what year-end tax strategies to pursue? At Stewardship Wealth Advisors, we provide an annual income tax review at the end of the second quarter and continually monitor your tax strategies throughout the year. We’ll help you prepare financially today so you can live purposefully tomorrow. Reach out to us at 623.251.7282, or email us at hello@swa.financial to schedule a complimentary introductory meeting.
About Stewardship Wealth Advisors
Stewardship Wealth Advisors is an independent, fee-based comprehensive financial planning firm dedicated to empowering clients to steward their wealth well and maximize their hard work and dedication. With decades of experience, our team of advisors builds a foundational relationship to create a personalized financial plan to help their clients reach their goals and achieve financial independence. To learn more about what we do and how we can help you, connect with us online.
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