2020 Tax Planning Tip: Time your income and deductions
You may be able to defer some tax until next year by postponing the receipt of some income and paying some of next year’s deductible expenses this year. The benefit of deferring tax is that you gain another year to use or invest the money you otherwise would have paid in taxes this year.
Before postponing or accelerating anything, it is important to consider whether your financial situation may be different next year. If you expect to be in a higher tax bracket next year, you may find it more beneficial to accelerate income into this year so that it is taxed at a lower rate and to postpone paying deductible expenses until next year when your deductions will be worth more to you. Using this strategy may help reduce your total taxes over the two-year period.
There are several ways to time income and deductions. For example, to postpone the receipt of income, you might wait until next year to sell appreciated assets or to make taxable withdrawals from your tax-deferred retirement accounts. If you itemize deductions, you may be able to accelerate some deductions into this year by making deductible contributions to charity this year that you planned to make next year or by paying some deductible expenses early, such as paying your 2021 property taxes in 2020.
Please note that timing income and deductions can sometimes have unintended consequences, such as boosting your income to a degree that you are no longer eligible for certain tax breaks with income limits. It’s important to consider those consequences.
To view the 2020 tax bracket breakdown please click here .
We can assist you with these and other tax savings strategies so please reach out to us in Williston (802.878.1963) or Rutland (802.775.7132) for personalized advice.
This article is published in the November 2020 edition of Eye on Money. If you would like to be added to Copper Leaf Financial's mail list for this publication please email email@example.com.