Since the COVID-19 pandemic made the time fly by far too quickly, many people are just beginning to realize that they have only two weeks left to make all the necessary moves to decrease their taxable income. Here’s a rundown of the most popular ways to save on taxes and maximize your deductions:
Claim tax deductions
- Charitable giving. If you want to significantly cut your tax bill, you can deduct up to 50 per cent of your adjusted gross income when you make charitable contributions of cash, property and stock to charities or nonprofits. Remember to itemize your deductions and always keep your donation receipts!
- Educational expenses. If you are a student, you can claim a tax deduction for your tuition fees and other educational expenses.
- Medical bills. You can deduct medical expenses from your tax bill, but only if they amounted to more than 7.5% of your adjusted gross income.
- State and local taxes. You are allowed to deduct state and local income or sales taxes from your taxable income, but your deduction will be limited to a combined total of $10,000.
- Retirement account contributions. Make sure that you deduct all the contributions you made to your individual retirement account or your self-employed retirement account.
Donate appreciated stock
For those taxpayers who itemize their deductions, donating stock to charity can be the most effective way to decrease their tax bill. Consider donating the stock shares that you’ve held for over a year and that have increased in value — that is, long-term appreciated securities.
When you give stock to charity, you can deduct the fair market value of the shares and avoid paying the capital gains taxes on the appreciated value of those shares. If you had sold the shares first and then donated the proceeds to charity, you would have paid the capital gains tax, which would lead to a smaller charitable contribution and as a result, a smaller tax deduction.
Sell depreciated investments
When it comes to donating stock and securities to charity, it only makes sense to donate appreciated stock shares — donating securities that declined in value will not bring you any significant tax benefits.
However, if you sell the depreciated stock shares first and then donate them to charity, you will be able to create valuable capital losses to offset your taxable gains. This strategy is called “loss harvesting” — realizing your losses and offsetting your taxable gains by selling depreciated investments.
Open a donor-advised fund
A donor-advised fund is an excellent tax-saving strategy that will help you support the charitable organizations you care about while also receiving the tax deductions necessary to decrease your tax bill.
Here's how such funds work:
First, you open your donor-advised fund and donate cash, securities or other assets. After making a contribution to your fund, you will receive a federal income-tax deduction for the year when you made a donation. Afterwards, you advise the fund to make donations to your preferred charities either in the same fiscal year or anytime in the future.
Contribute to retirement accounts
The truth is, there might not be a better tax-saving strategy than investing in your own retirement account. In fact, contributing to a company-sponsored 401(k) plan is often the best way to save on taxes while also ensuring your future financial security since many employers tend to match such contributions.
In addition, contributing to an IRA also reduces your taxable income for the year. However, remember that you can contribute a maximum of $6,000 to an IRA and an additional $1,000 if you are 50 or older.
If you're registered as self-employed, consider enrolling in the Keogh plan — a tax-deferred pension plan that accepts contributions until the tax filing deadline and not the end of the fiscal year.
Choose the right filing status
There are five tax filing statuses: single, head of household, married filing jointly, married filing separately, and qualifying widow or widower. Your filing status can determine how much you pay and owe in taxes as certain statuses have more tax advantages as the others.
For instance, the couples that choose to get married before December 31st will be eligible to file a joint return for that tax year. According to Business Insider, "there are a few major benefits to married filing jointly, including access to valuable tax credits, a larger standard deduction, a larger capital loss deduction, and combined incomes, potentially bringing a higher earner into a lower tax bracket.