• Peter Newman, CFA

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

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.

The first part of this series will discuss itemization to increase tax savings, deducting mortgage interest, charitable giving, and deducting SALT. The second part of this series will discuss reducing your tax burden through retirement account contributions, tax-loss harvesting, and real estate investments. Be sure to subscribe so you receive notification of this article’s release.


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


Itemize To Increase Tax Savings

Compared with taking the standard Federal deduction, many of my clients save thousands of dollars by itemizing deductions on their tax return. Here is how it works. During 2020, the standard deduction is $12,400 for singles filing and $24,800 for married couples. Your CPA or financial planner will then calculate the value of the itemized deductions we mention below. When your itemized deductions exceed the standard deduction, you pay less in taxes and keep more in your pocket.


Common itemized deductions are mortgage interest, charitable gifts, unreimbursed medical expenses, and state and local taxes. We will explain these topics in detail below.


Mortgage Interest On Your Primary And Second Home

Mortgage interest write offs are one of the most popular deductions on tax returns. In today’s low interest rate environment, some individuals are comfortable having a mortgage, paying the bank a paltry 2.5% interest and investing loan proceeds in the stock market.


You can deduct the mortgage interest you paid during the tax year on the first $1 million of mortgage debt for your primary home or a second home. If you bought the house after December 15, 2017, you can deduct the interest paid during 2020 on the first $750,000 of the mortgage.


As long as you have sufficient income to service your mortgage debt, you may be able to earn more in the stock market than you pay in interest and increase your overall wealth.


Bunch Charitable Contributions

Donations to charity are tax deductible if you itemize on your return. If you are interested in giving to a charity and usually take the standard deduction on your taxes, you may want to consider bunching your contributions during a single calendar year so your deductions exceed the standard deduction.


By bunching donations, you combine multiple years of "normal" annual charitable contributions into a single year. In the bunch years, the relatively large charitable contributions, in combination with other itemized deductions that cannot be timed this way — i.e. mortgage interest, state taxes, and property taxes — will increase the likelihood of exceeding the standard deduction and thus provide you with additional tax savings.


You can bunch your donations to support multiple charitable organizations in one year. Or, you can make a large contribution to a Donor Advised Fund and make grants to multiple charitable organizations across many years.


Hot tip: Because of the coronavirus, you can take a $300 charitable deduction even if you do not itemize your deductions.


Donate Your Stock

If you have highly appreciated stock, consider whether to donate stock before the end of the year instead of donating cash. If you sell the stock outright you will have a capital gain with a tax bill. The tax will reduce the value of your donation. If you donate stock, most charities can sell the stock without paying taxes. This strategy will warm your heart, benefit the charity more, and lower your tax burden.


State and Local Taxes (SALT)

The deduction for state and local taxes, also known as the SALT deduction, is one of the most popular itemizable deductions on U.S. tax returns.


Before the passage of the 2017 Tax Cuts and Jobs Act, it was the most widely-used deduction by Americans in terms of dollar value. The SALT deduction includes the following:

  • State and local property taxes, including real estate taxes and taxes assessed on other personal property, such as automobiles.

  • State and local income taxes or state and local sales taxes.


The major change made by the 2017 tax law is that the entire deduction is capped at $10,000 per return. In other words, if you paid $12,000 in property taxes and $7,000 in state income taxes for 2019, your SALT deduction is $10,000, not the $19,000 you actually paid for those expenses.


Example of these Itemized Deduction Strategies Working Together

Let’s say you’re married with $400,000 of taxable income. For this example, you:

  • paid $18,000 in mortgage interest,

  • gave $6,000 to charity,

  • paid $5,000 in deductible medical expenses,

  • paid $7,000 in state income taxes, and

  • paid $12,000 in real estate taxes.


In this example if you take the standard deduction in 2020 you would reduce your $400,000 income by $24,800. But, by itemizing you can reduce your income by $39,000. This should allow you to keep $5,700 of additional cash in your pocket on your federal and state tax returns.


Final thought.

Itemizing deductions takes time and planning. Many individuals skip this valuable opportunity because they just don’t realize what it is they are missing.


Schedule an appointment with your CPA and financial planner to make sure you have optimized your tax savings. This is time sensitive, so take action today! If you’d like assistance with your strategy please reach out to me.


Next week, the second part of this series will be released. It will discuss reducing your tax burden through retirement account contributions, tax-loss harvesting, and real estate investments. Be sure to subscribe so you receive notification of this article’s release.



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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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