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How to Reduce Your Taxes ( Part II )
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 .
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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 can be saved each year 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 .
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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 .
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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 .
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RMDs as Charitable Giving
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 .
12 Relocate
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 info @ lighthousewlth . com .
Tom Kozlowski , CFP ® Co-Founding Partner
Lighthouse Wealth Management (" LWM ") is registered as an investment advisor with the Securities and Exchange Commission . LWM only transacts business in states where it is properly registered or is excluded or exempt from registration requirements . This material has been prepared for informational purposes only , and is not intended to provide , and should not be relied on for , tax , legal or accounting advice . You should consult your own tax , legal and accounting advisors before engaging in any transaction .
LakeTalk February 2021 19