- You still have time to minimize the impact of taxes in 2020.
- Certain account contributions and tax deductions could lower your tax bill.
- Consider options across medical expenses, stocks, a favorite charity or an IRA.
Here are several ideas that could help reduce the impact of your 2020 federal income tax. When considering options that involve investments, your Ameriprise advisor can work with your tax advisor — or recommend one — to provide advice personalized for your goals.
Deduct medical expenses
If you itemize your tax deductions, you may be able to deduct eligible unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). There is a wide range of deductible medical expenses — talk to a tax professional or visit the IRS website for details.
Consider a smart tax strategy for stocks
In a well-diversified portfolio, over time you’ll have investments that have increased or decreased in value. You might be able use a loss to generate a lower tax bill for a given calendar year.
This process is called tax-loss harvesting. With recommendations from your advisor, you can immediately reinvest in an asset that offers a similar risk/return profile as what you sold. This enables you to stay invested and benefit from a potential future rally in stock prices.
Contribute to a charity
If you are age 70.5 or older and would like to support a charity that’s important to you, consider a qualified charitable distribution (QCD) from your IRA. A QCD is not available from a 401(k) account.
For some, a QCD has distinct advantages over a regular charitable contribution:
- Helps reduce your AGI and taxable income for the 2020 tax year
- Works whether you take the standard deduction or itemize deductions
- Enables a contribution up to $100,000 per year. A regular charitable contribution deduction is typically limited to no more than 60% of AGI
Considerations for 2020 tax year only, due to the CARES Act:
- Required minimum distributions (RMDs) are waived for 2020.
- Even taxpayers who don’t itemize can deduct up to $300 in charitable contributions. The contributions must be made in cash to certain charitable organizations, but not to donor-advised funds or certain private foundations. A charitable contribution carryover does not qualify for this deduction.
Make an IRA contribution
Consider contributing to your traditional or Roth IRA. You can do so in a lump sum if you’d like. The maximum total annual contribution across all IRAs for 2020 is $6,000, or $7,000 if you are 50 or older by December 31, 2020.
Your contributions to the traditional IRA may be tax deductible, depending on your income level and whether you are covered by a retirement plan at work. Depending on your income level, you may be eligible to make a contribution to a Roth IRA. Roth IRAs don’t give you a current tax deduction but distributions are tax free in retirement if certain conditions are met. For 2020 tax purposes, the contribution deadline is April 15, 2021.
We can help with year-end planning
Financial planning factors in your tax situation. For that reason, your Ameriprise advisor is committed to collaborating with your tax professional. They will help you understand how those decisions impact your tax situation. If you are looking for a tax or legal professional, your advisor may be able to refer you to one.