Over the last three years, thousands of pages of tax code have been written – or, should I say, rewritten. The bulk of new tax code came from the Tax Cuts and Jobs Act (TCJA) in 2017, the Secure Act in 2019, and the Cares Act in 2020. With so many changes, it’s understandable that easy deductions and tax reduction strategies are often missed.
As a financial planner, one of my duties is to work with our tax team to ensure clients take advantage of as many available tax deductions and credits as possible for their situation. To pinpoint available opportunities within the tax code, we compiled the Lighthouse Tax Reduction Checklist. This is a list of 46 tax deductions and strategies that we use to identify potential tax savings for clients. Last month, we introduced you to the first seven items on our list. This month, we’re highlighting the next five.
8. Maximize Your Company Retirement Plan
For salaried workers, employer sponsored plans are one of the best tax reduction options available. Whether it be a 401k, 403b, 457, or government sponsored TSP, thousands of dollars each year can be saved by contributing directly from your paycheck. Many people make the mistake of only contributing the employer “match” which is typically 6% of your pay. If affordable, contributing the maximum amount (for 2021, $19,500 with an additional $6,500 if age 50 and over) can not only save money but may also keep you from entering a higher income tax bracket.
9. Charitable Giving
If you are charitably minded, gifting an appreciated asset can maximize the amount the charity receives and eliminates taxes you may have paid. An example: you bought 100 shares of XYZ stock ten years ago for $10 per share for a total investment of $1,000. Today, XYZ stock is worth $50 per share for a total of $5,000. If you sell the stock to give cash to the charity, you will owe capital gains tax on the $4,000 profit. If you gift the stock to the charity instead, the charity can sell the stock and pay no tax since nonprofits aren’t subject to capital gains tax.
10. RMDs as Charitable Giving
This is another gifting strategy for those who are required to take money from their retirement accounts (age 72 and over) and file using the standard deduction. Those who itemize get the full amount of their charitable gifting as a tax write off in the year given. Those filing with the standard deduction do not get to deduct their charitable gifts. By instructing your custodian (the company where your retirement plan is held) to write a check to the charity instead of to you, you don’t have to claim that amount on your income tax. That means you get the benefit of both the standard deduction and in this case, the charitable contribution.
11. Social Security & State Taxes
Many retirees look to move to lower cost of living areas. While most states do not tax Social Security benefits (Maryland does not), thirteen do. The amount of Social Security these states tax varies, too. It’s good to be aware of this before you move. For reference, the states that do tax social security benefits include: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
You have undoubtedly read of the mass exodus out of high tax states to low tax states over the last few years. COVID-19 has only accelerated that trend. If you have the ability to work from home or just want to live in a more favorable tax environment when you retire, there are seven states that have no income tax. These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee don’t tax earned income either, but they do tax investment income – in the form of interest and dividends – at 5% and 1%, respectively.
Again, these are only a few of the items we review to minimize taxes for our clients. And less tax means you keep more of your hard-earned money. Reach out if you’d like a review of your personal tax situation. Call us at 301-865-9740 or email us at firstname.lastname@example.org.