Did you end up writing a big check to the IRS this year? If so, you probably are wracking your brain trying to think up ways to avoid that steep bill again in 2020. The recent changes to the federal tax code have meant breaks for some, but for most of us, we have seen a noticeable climb in our amount owed on an annual basis. The new laws have implemented many regulations that limit the amount of property and state income taxes that can be deducted. Combine that with your state taxes, and you could be left with a huge bill that you can’t escape. Luckily, there are a few things that you can do with your money in an effort to reduce your tax bill this year. If you’re stuck with a tax problem and don’t know what to do, contact Inside Out Tax to schedule a free consultation today.
Utilize Qualified Dividends From Personal Savings
All earned money that goes into your savings account has already been taxed. With that being said, it would make sense that the government taxes the interest you earn on your savings accounts, stocks, and mutual funds at a substantially lower rate than other income. If the amount of income you earn from this interest is below a certain level, it will actually be completely tax-free, so make sure you track how much income you make from these accounts. The income earned from this interest is referred to as “Preferred income” and is an extremely lucrative way to make extra tax-free or lowly taxed income. Although transferring money into your savings accounts won’t save you any money for the first year, it will continue to make you reliable income year over year.
Reduce Your Taxable Distributions From An IRA
Retirement planning can be extremely stressful. Advancements in medicine have blessed us all with extended life expectancies, which means that if you retire at 60, you should be prepared for 30-40 years of retirement. Traditional IRAs are one of the most utilized retirement vehicles since many companies have a retirement savings program and the money you invest in your IRA is non-taxable. This type of savings account does not come without its pitfalls; the money that you withdraw from your IRA is viewed as ordinary income by the IRS and is taxed as such. Once you turn 70.5 years old, you are required to start withdrawing money, regardless of whether you need it or not. You can delay these inevitable taxes by shifting money from your IRA into a QLAC, or a Qualifying Longevity Annuity Contract. You won’t pay any taxes on this money until your QLAC starts generating annuity payments, which is a great way to ensure that you have enough money throughout your retirement.
Transition Money From Traditional To Roth IRAs
No one likes to think about the idea of passing away, but it is important to plan for the future. All funds that you leave in your traditional IRA will be taxed as income, be that for you or your surviving family members. A way to get around this tax hole is by slowly transitioning money from your traditional IRA to a Roth IRA. The funds in a Roth IRA will be passed on tax-free, leaving your loved ones with substantially more money.
No matter what your financial situation may be, it’s never too early or too late to start preparing for the future. Start keeping more of your money for yourself and your family by getting ahead of current tax laws. If you find yourself the victim of a large tax bill, give Inside Out Tax Resolution Services a call to explore your options.