• Peter Newman, CFA

'Tis the Season to Reduce Tax Burden (part 2)

Updated: Mar 12

We are coming up on the end of the year. It is important to consider what your tax bill might be for 2020. Before the end of the calendar year, have a conversation with your CPA and financial planner to evaluate the opportunities detailed in this 2-part tax reduction series.

Pay less taxes through itemizing your deductions. It is like a gift from the U.S. Government.

Previously, I shared strategies to reduce your tax burden by itemizing deductions, deducting mortgage interest, charitable giving, and deducting SALT in ‘Tis the Season for Reducing Your Tax Burden (part 1). This article will cover reducing your tax burden through 401k contributions, individual retirement account contributions, tax-loss harvesting, and real estate investments.


These strategies together can reduce your tax burden and improve your financial well being.


401k Contributions

Employees may contribute up to $19,500 to their 401(k) plan for 2020 and 2021. Anyone age 50 or over is eligible for an additional catch-up contribution of $6,500 in 2020 and 2021. If you haven’t contributed the maximum amount to your 401k for 2020, speak with your company’s HR person and make a large one-time contribution before year end to get to the maximum invested.


Investing more in your 401k today allows your investments to grow in a tax deferred account until you need those funds at retirement. This increases your nest egg and reduces the income tax you pay. Plus, your employer may match your contributions, further increasing your wealth.


If you are an entrepreneur ask your financial advisor whether a 401k is the best option for you to reduce your tax burden.

Individual Retirement Account Contributions

If you maxed out your workplace 401(k) to save on taxable income during 2020, you can still contribute $6,000 ($7,000 if over 50) to an individual retirement account (IRA). This will provide an additional tax deduction if your income isn’t too high.


If your income exceeds the threshold, you can work with your financial advisor on a more advanced strategy to make traditional IRA contributions without a tax deduction. Even here you will benefit from tax deferred growth on your money.


Further, you may be a candidate for a Roth conversion. A Roth conversion won’t reduce your tax bill today, but it can save you plenty during retirement years. I will discuss Roth conversions later this month.


Capital Gains Tax Loss Harvesting

Many people invest for the long term in a brokerage account with the help of a financial advisor. Sometimes securities in your account may be down in value, but you plan to hold them for the long haul. This may provide an opportunity to reduce your tax liability.


Tax-loss harvesting is when you sell investments at a loss in order to reduce your tax liability. You can harvest losses to offset gains. If you have a stock that went down significantly in value – for example you are down $20,000 – then you might offset that loss by selling stock with a $20,000 gain.


The loss and the gain cancel each other out resulting in no taxes on the gain. You could even re-invest in the stock that you sold to generate the loss after 30 days to continue holding the company you feel will do well in the long term but had a temporary hiccup. Furthermore, you can offset a small portion of W-2 salary income with up to $3,000 in capital losses each year.


Real Estate Investing -- Direct Ownership

Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property. The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.


A key benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity. Building up equity increases your wealth. Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.


Make no mistake, though, investing in real estate directly is a business endeavor. Many people enjoy searching around for a good deal on a property and running their own business as an owner and property manager. Other real estate investors will outsource their property management, at a cost, to a professional.


Real estate can be an attractive investment and increase your wealth. I spent more than 20 years as a real estate investor. I would be pleased to share the pros and cons of property ownership with you.


If you would like to discuss real estate investing, please schedule a call with me today.


Final Thought.

Don’t allow the opportunity to optimize your tax deductions to slip by. Before the end of the calendar year, have a conversation with your CPA and financial planner to evaluate the opportunities detailed in this 2-part tax reduction series.


This is time sensitive, so take action today!


If you’d like a second opinion, reach out to me.



You may also be interested in reading:

'Tis the Season to Reduce Tax Burden (part 1)



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About the Author

Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.


Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance and estate planning advice, Peak Wealth Planning is a fee only financial advisor based in Champaign, Illinois.

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