Five Strategies to Reduce Your Tax Liability – and Increase Your Refund in 2020!
Updated: Dec 28, 2019
1. Keep donating to charity – but alternate years to increase your total tax deductions.
For those who typically donate thousands of dollars to 501(c)(3) charities each year, it makes sense to consider doubling those typical donation amounts for 2020. This strategy may increase the amount of total deductions above the standard deduction of $12,200 for single filers or $24,400 for married filers. By alternating years of donation (the taxpayer would not donate in 2021) this strategy reduces tax liability for the years when taxpayers itemize, and allows them to take the standard deduction on alternate years.
2. Prepare for retirement – increase your contributions to 401(k) or 403(b).
We all will have to retire one day, so why not reduce tax liability by preparing today? A simple solution is to participate in an employer-sponsored retirement plan. By increasing contributions, taxpayers reduce gross income which results in a lower tax liability. And the good news? The maximum contribution for 2020 has been increased to $19,500 (up from $19,000 in 2019). Taxpayers over the age of 50 may contribute an additional catch up contribution of $6500. Everyone can participate in a traditional IRA, even if employers do not offer a plan. For 2020, the maximum contribution is $6000, and taxpayers over age 50 can contribute $7000. Remember, traditional IRAs are funded by pre-tax dollars. Taxpayers interested in reducing tax liability on retirement earnings should consider a Roth IRA instead.
3. Invest in a Health Savings Account (HSA).
Taxpayers that have a high-deductible health insurance plan can contribute to a HAS to reduce tax liability. Any contributions are with pre-tax dollars, meaning taxpayers will reduce gross income by the amount of total contributions. Maximum contribution for 2020 is 3,550 for single taxpayers, and $7,100 for families. Money invested in HSAs earns interest but taxpayers do not pay any tax on the earnings.
Another advantage of HSAs: when taxpayers withdraw from them to pay for qualified medical expenses, the withdrawals are not taxable.
4. Low income taxpayers can take advantage of certain tax credits
When lower income taxpayers save for retirement, the IRS allows a Saver’s Credit. Qualified taxpayers may receive a credit for up to half of the amounts contributed to their retirement plan, IRA, or ABLE account (savings accounts for certain disabled individuals).
5. Take advantage of Flexible Spending Accounts (FSA) if an employer offers it.
The IRS allows taxpayers to contribute pre-tax dollars directly into flexible spending accounts. These funds must be spent during the year on qualified expenses which include items such as incontinence aids, breast pumps, and diabetic supplies. If the taxpayer or a dependent uses such items regularly, and the employer offers this account, it makes sense to reduce tax liability by contributing. For 2020, the FSA contribution limit is $2,750.