Moves That Will Slash Your Tax Bill

No matter how much money you make, your goal should be to pay the Internal Revenue Service (IRS) as little tax as possible. And the smarter you are about taking advantage of tax breaks, the greater your chances of that happening. If you are housing your retirement savings in a Roth individual retirement account (IRA) or 401(k), you will not get an immediate tax break for making contributions.

But if you have your savings in a traditional retirement plan, whether an IRA or a 401(k), the more money you put in 2020, the less tax you will pay the IRS. For 2020, IRA contributions max out at $6,000 if you are under 50, or $7,000 if you are 50 or older. If you have a 401(k), you can put in up to $19,500 this year if you are under 50, or $26,000 if you are 50 or older.

Your savings, meanwhile, will be a function of the tax bracket you fall into. Say you are in the 24% tax bracket, which means you pay that rate on your higher dollars of earnings. If you put $6,000 into a traditional IRA this year, you will shave $1,440 off your tax bill, just like that. And of course the higher your tax bracket, the more savings you actually stand to reap.

Not everyone has access to a health savings account (HSA).

But if you are on a high-deductible health insurance plan this year, then it pays to see if you are eligible and put in as much money as possible. Your contribution limit for 2020 will depend on whether you are funding an HSA just for yourself or on behalf of a family. If it is the former, then you can put in up to $3,550 if you are under 55, or $4,550 if you are 55 or older.

If you are funding an HSA on behalf of a family, these limits increase to $7,100 and $8,100, respectively. As is the case with traditional IRAs and 401(k)s, the money you put into an HSA is income the IRS can not tax you on. You will then have the option to use your HSA contributions to pay for qualified medical expenses, or invest the money you do not need immediately so it grows into a larger sum, just like you can invest an IRA or 401(k).

Your goal in buying stocks is to make money. But if you have specific stocks that have been underperforming, unloading them could actually save you big money on taxes. Specifically, any loss you take in your brokerage account can be used to offset capital gains, which you would normally pay taxes on. If you take a $4,000 loss and have $5,000 in capital gains from selling investments at a profit, you will only end up needing to pay taxes on $1,000 of gains.

Furthermore, if your investment loss for the year exceeds your gains, you can then use it to offset up to $3,000 of ordinary income.

And if there is money left over after that, you can carry it into 2021 and use it to lower next year’s taxes, too. The less money you have to pay the IRS, the more you get to keep, invest, and enjoy. It pays to employ these strategies if your goal is to lower your tax burden and reap the major savings that come along with it. A group of stock exchanges and trading platforms have banded together to create the Coalition to Prevent the Taxing of Retirement Savings in reaction to a proposed financial transactions tax in New Jersey.

The coalition, which contends that millions of Americans who invest in financial markets to save for retirement would be hurt by this new tax, is planning tests in the coming weeks to ensure that they have the ability to move out of New Jersey if the tax makes it impossible for them to operate in the state. There is this idea, which was true for a long time before there was full electronic trading, that you needed proximity, you needed to be close. What this test will be establishing is that these data centers are quite portable.

This is not something that these companies want to do, by any means, but they are concerned about the possibility of rising costs, and they have customers who are concerned about costs as well. A bill introduced into the New Jersey state legislature, which has the support of Governor Phil Murphy, would impose a tax on persons or entities that process 10,000 or more financial transactions through electronic infrastructure located in New Jersey during the year. The tax would work out to a quarter of a cent per transaction.

With billions of financial transactions processed daily, some projections from the legislature estimate New Jersey could collect $10 billion annually from the tax on stocks, options, futures, and swaps trading made in the state’s electronic data centers.

Members of the coalition include the New York Stock Exchange, Nasdaq, Members Exchange, Cboe Global Markets, Citadel Securities, Virtu Financial, TD Ameritrade, and Equinix. New Jersey is home to for many Wall Street server farms. The first test to move beyond New Jersey will take place on Saturday September 26th 2020. Members of the coalition were already planning a test for that weekend, but the plans were recently expanded to test full functionality in light of New Jersey’s proposed financial transaction tax.

The scope for this weekend test has been expanded from a connectivity-only test to a full feature test of all exchange functionality in order to ensure data center’s ability to quickly relocate operations from New Jersey to Illinois in the event that it was determined transacting exchange business would result in extra, unnecessary costs to investors. The test is to ensure that they can leave New Jersey if adverse tax policies are enacted. Nasdaq will be taking part in the test to ensure that it can move out of New Jersey for financial feasibility if it needs to.

Senator Bernie Sanders has introduced a financial transaction tax (FTT) bill at the federal level that claims would generate $2.4 trillion in revenue over a decade. An FTT could be a substantial revenue source for governments, but would have adverse effects on financial markets and the economy. The burden of an FTT would primarily fall on the wealthy, as the wealthy hold and trade financial assets the most frequently.

However, the portfolio values of all investors would be decreased by the reduction in asset prices. An FTT would increase the cost of consumer goods, meaning that all taxpayers would be subject to the tax indirectly.