AARP Hearing Center
2020 can't end soon enough for me; maybe you're feeling the same way. But while we're counting down the socially distanced minutes to Jan. 1, let's use this time to do things now to lower our tax bill. Here are a few ideas that may be right for you.
1. Harvest your investment losses. If you have some stocks or funds in a taxable account with losses, consider selling. You can use an unlimited amount of losses to offset taxable gains. And you can generally deduct up to $3,000 in additional losses and carry forward additional amounts to future years. You'll have to wait at least 31 days to buy it back or the IRS will consider it a tax wash sale.
2. Harvest your investment gains. This is pretty much the opposite of the previous idea. If you've held that security for more than one year, the federal government taxes it as a long-term capital gain. That tax rate happens to be at zero percent for married couples filing jointly with up to $80,000 in taxable income, or a single taxpayer with up to $40,000 in taxable income.
Since the 2020 standard deduction is $24,800 for married filing jointly and half that for singles, this means a married couple filing jointly can earn at least $104,800 and not pay federal income taxes on these long-term capital gains — profits on stocks held more than a year. Those filing single returns can earn half of this amount and not pay federal taxes on long-term capital gains.
3. Donate to your favorite charity. Charitable contributions are normally itemized deductions and won't help you lower taxes unless you itemize. But the CARES Act allows up to $300 (married or single) this year in an above-the-line deduction, meaning that it helps you whether you itemize or not. Plus, you get to support your favorite charitable cause.
4. Contribute to your 401(k), 403(b) or IRA. If you have a little extra cash from that cancelled vacation, consider upping your contributions to your employer plans. You'll enjoy that vacation so much more when you are retired and COVID is just a bad memory. Though you have until Dec. 31 to contribute to a 401(k) or 403(b) and until April 15 to contribute to your IRA, why wait?