September 01, 2020

We have renamed the 9th month of the year to TAXTEMBER!!!

It is a month to focus on all things taxes because taxes matter. During this month of Taxtember, we will provide various tax planning strategies that you can implement in your paycheck, in your portfolio, or in your giving with the goal of lowering your tax bill in 2020.  By having four months to implement these strategies you won't be scrambling the last week of the year.  Your post office, charitable organizations, HR department, tax preparer, spouse, and investment advisor will say “Thank you” for being proactive.  

Some of these tactics may be relevant to you while others might be applicable to a situation for a neighbor or a family member.  You can look like the smart guy on the block when you start talking about Donor Advised Funds or Tax Loss Harvesting.  (Even throw out the phrase “well it’s Taxtember you know!”).

The first week is very basic. 

Contribute to your retirement accounts.

That being said, take a moment to review how much you have invested this year and make it a goal to max out for the year.  By contributing to these accounts you are reducing your tax expense for 2020. (Except for the ROTH which reduces your taxes in the future.)

The limits are below:

The contribution limit for a Traditional IRA or Roth IRA is $6,000 with a catch-up limit of $1,000 for individuals that are 50 years old or older. 

The SIMPLE IRA contribution limit is $13,500 with a catch-up limit of $3,000 for individuals that are 50 years old or older. 

A 401(k), 403(b) or 457 have contribution limits of $19,500 with a catch-up limit of $6,500 for individuals that are 50 years old or older. 

The SEP IRA’s contribution limit is the lesser of $57,000 or 25% of eligible compensation with a compensation cap of $285,000. 

A Health Savings Account has limits of $3,550 for an individual or $7,100 for families with individuals 55 years or older having a catch-up limit of $1,000.


Let’s also do a quick review of how the US marginal tax system works.  Taxpayers do not pay the same tax rate on every dollar of income, but pay an increasing tax rate as income rises.  Below is a fictitious example of how our system works.

Let’s say we have 3 tax brackets of 10% <$50,000, 20% $50,001-$100,000, and 30% >$100,001.  Our income is $150,000.

Our income will be taxed at different rates.  We will pay $5,000 in taxes in the first bracket up to income of $50,000.  In the next bracket, we pay tax of $10,000 on our income from $50,001 to $100,000.  Then on the last bracket we will pay tax of $15,000 on income above $100,000.  So our total tax is $30,000 ($5,000 + $10,000 + $15,000).  Our effective tax rate is 20% which is $30,000/$150,000.  Total tax/Total income.

So our goal sometimes is to look for opportunities to remain in the lower tax bracket.

Next week…..ROTH Conversion