How to Save Money on Taxes

November 20, 2020
tax show

Taxes are an unavoidable part of life, but there are ways to lower your tax burden. In 2020, there was a plethora of new legislation and law changes that could change your next tax bill. It’s important to know how those changes affect you and how to optimize your tax strategy. Here are the best ways to save money on taxes in 2020.

Special charitable deductions

Normally, charitable contributions are a below-the-line (itemized) deduction. That means if you take the standard deduction and donate to charity, you aren’t able to deduct your donation on your taxes. In 2020, though, the CARES Act created a special $300 above-the-line charitable deduction for cash contributions. If you expect to take the standard deduction and aren’t normally able to deduct your charitable contribution on your tax return, make sure to take advantage of the special rules for 2020.

If you are someone who typically itemizes, you can take full advantage of donating to charity. It may be more beneficial to donate clutter to stores like Goodwill and Habitat for Humanity instead of selling your stuff online or at a yard sale; you help charity, can deduct your donations, and save time. Advanced giving strategies, like donating appreciated holdings or qualified charitable distributions, can benefit both you and your charity of choice.

Harvest losses

While the S&P 500 and other large cap domestic stock indexes have mostly recovered from their lows in March, other sectors weren’t as lucky. If you have positions with sizable losses in a taxable investment account, it may make sense to harvest some of those losses. Harvesting losses locks in positions that are down; currently you can deduct $3,000 in losses against ordinary income, and losses can be carried forward to future tax years.

Free capital gains!

The lowest capital gains rate is 0%, and if you find yourself in this bracket, take advantage of it while you can. If your income is less than $80,250 for married couples and $40,125 for individuals in 2020, your long-term capital gain transactions could be taxed at 0%. If you have positions with a long-term gain in a taxable account, you may be able to take advantage of free capital gains.

Understand stimulus money

Earlier this year when the CARES Act was signed into law, millions of Americans received a $1,200 stimulus check (or more if you had a spouse and kids). There were income thresholds for determining the amount received; the good news is that if you received a stimulus check earlier this year, the money is yours to keep (even if you end up exceeding the income threshold in 2020). If you weren’t eligible for the rebate earlier this year but will be eligible based on your income in 2020, you can expect to receive your stimulus check as a credit when you file your 2020 taxes.

Unique distribution opportunities

Millions of Americans lost their jobs this year, and, subsequently, retirement account distributions were made available to many people that may not have previously had access. If you don’t need to withdraw money from your retirement account, don’t do it! It’s best to avoid withdrawing money from your retirement account at all costs, but the option may be available if you need it. In addition to unique distribution opportunities, many retirees who would have been required to take RMDs this year may now skip this year’s RMD. If you don’t need the money, skipping your RMD this year could be a great opportunity to let those retirement assets grow even more.

Max out retirement plans

Contributing to your retirement account or a traditional IRA can be a great way to lower your tax burden, but it may make more sense to contribute to Roth, pay taxes now, and save the tax break for your future self. If your combined marginal tax rate (state, federal, and any local income tax) is less than 25%, it may make sense to contribute to Roth while you’re in a lower tax bracket. If your combined marginal rate is greater than 30%, you might want to consider taking the tax break now and contributing to a traditional IRA or making pre-tax 401(k) contributions.

Avoid IRS penalties

The IRS can have some pretty stiff penalties if you make mistakes or don’t pay the amount of taxes you owe, so it’s important to get it right on the front-end and avoid IRS penalties. If your tax return isn’t very complex you may be able to use a free online filing service, but don’t be afraid to hire a professional when you’ve reached a level of complexity where it makes sense to. Paying someone else to do your taxes may seem expensive, but could potentially save you thousands.

Our latest show, “Top 10 Year-End Tax Planning Tips for 2020,” is our list of the 10 tax tips you need to know in 2020. If you haven’t already, visit our resource page to download our 2020 tax guide, and watch our latest episode now on YouTube below.




Most Recent Episodes

Financial Planning 101 (By Age) 2023 Edition

Throughout every decade, there are different areas of your financial life that come in and out of focus. In this episode, we'll discuss what you need to focus on by age, pitfalls to watch out for, and how to know you're doing it right. In this episode, you'll learn:...

Is the 2023 Housing Crash Around the Corner?

Housing prices skyrocketed after the pandemic to all-time highs, and mortgage rates have more than doubled since 2020. Homes are harder to purchase for more Americans, which means it’s more important than ever to make sure you are ready to buy before purchasing. In...

Watch This Before Rebalancing Your Investment Portfolio!

85% of Americans don’t rebalance their 401(k). Are they making a huge mistake? In this episode, we’ll discuss the “why” behind rebalancing, how to do it, and the data on whether or not rebalancing can increase your return. In this episode, you’ll learn: What...

Don’t Make This HUGE 401(k) Mistake!

Americans are making a HUGE mistake in their 401(k) that could cost them thousands by retirement. We’ll talk about why this is happening and how you can avoid making the same mistake in this Q&A episode! For more information on how to make the most out of every...

Alex Hormozi’s Top Money Advice! (Financial Advisors React)

In this episode, we react to Alex Hormozi's financial advice. Enjoy the Show? Sign up for the Financial Order of Operation (FOO) Online Course! Sign up for our Know Your Number Course! Check out our Net Worth Tool! Get FREE downloads full of financial advice from...

Everything You Need to Know About Finances in Your 20s

In this episode, we discuss everything you need to know about finances in your twenties. In this episode, you’ll learn: The top financial advice for your twenties How to start building wealth and the steps you should take Enjoy the Show? Sign up for the Financial...

The Most Valuable Asset in Building Wealth!

This episode will show you how to maximize the most valuable resource you have - starting right at this moment. What is it, you may ask? It’s TIME. If you give your money time to grow, you’ll be amazed at how much your dollars can become - it’s incredible! How wild is...

Financial Hacks and Habits of the Top 1% (By Age)

Who wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% and the habits and hacks those in the top 1% used to get there.   In this...