Are you ready to implement habits in your own life that will contribute to your net worth & help you retire with a nice income. This will be an ongoing series to help you maximize your retirement and save on taxes.
Tax Brackets for 2020
What is your tax rate for 2020? Let's take a look at your income and then, check your tax rate in the first column. In this example below, if you made $9,500 last year, your tax rate would be 10%.
|Rate||For Single Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||Up to $9,875||Up to $19,750||Up to $14,100|
|12%||$9,876 to $40,125||$19,751 to $80,250||$14,101 to $53,700|
|22%||$40,126 to $85,525||$80,251 to $171,050||$53,701 to $85,500|
|24%||$85,526 to $163,300||$171,051 to $326,600||$85,501 to $163,300|
|32%||$163,301 to $207,350||$326,601 to $414,700||$163,301 to $207,350|
|35%||$207,351 to $518,400||$414,701 to $622,050||$207,351 to $518,400|
|37%||$518,401 or more||$622,051 or more||$518,401 or more|
The Standard Deduction for 2020
First, take a look at the standard deduction for 2020. Instead of itemizing your deductions, you can claim a standard amount below:
- Single – $12,400
- Married, Filing Jointly – $24,800
- Head of Household – $18,650
- Married Filing Separately – $12,400
Maximize Your 401(k) Contributions
For 2020, you can contribute $19,500 per year into your 401k. If you are over 50, you can contribute up to $26,000. Look at the IRS highlights for 2020 here.
Maximize Your IRA Contributions
Now, there are two paths to take here. Would you rather contribute the $6,000 to a Roth IRA after taxes are paid? OR would you rather contribute the $6,000 to a Traditional IRA and save on taxes now?
We did a recent survey on TikTok (and yes, the comment section / educational videos on TikTok are worth more than any college degree). The financial experts who weighed in all agreed that the best setup is:
- Contribute / Match your employer's contribution to your 401(k)
- Then, max out your Roth IRA. That way – as your Roth IRA grows – you can withdraw the amount you contribute at anytime without paying additional taxes on it. (because you are using after tax dollars to invest in your Roth). As your Roth IRA grows, you can withdraw all of it at age 59 1/2 tax-free. We're all in agreement that paying the tax now and investing it to enjoy the growth later is the way to go.
If you don't have an IRA, you can start with M1 Finance which provides a free checking, free savings and IRA investing all in one app. And they are on our approved partner list! Click here for details
What I like about M1 Finance is that you can copy portfolios from 80 different experts, plus you can buy fractional shares of high-priced stocks.
American Opportunity Tax Credit
You can reduce your taxes by $2500 if you paid tuition, books and school fees. If your gross income is less than $80,000 or $160,000 jointly, you can claim the American Opportunity Tax Credit.
Student Loan Deduction
On the same note, you can deduct up to $2,500 from your income if you paid interest on your student loans. For example, if you have $30,000 in student loans and paid $2,500 in interest, you could reduce your taxable income by $2,500, which is the portion that went toward interest.
If your students are out of control, then get a “super money” loan to combine all of your student loans into one payment. Click this link and then, select student loan at the bottom.
You will receive a 1098-E form that will be mailed or emailed that shows you how much interest you paid on the student loans. If you owe no tax, you can get a refund up to $1,000 or 40% of the value.
Lifetime Learning Credits
This credit is for ANY students and there's no limit to the number of years you can claim it. For example, if you took a undergraduate, graduate, vocational or non-degree class, you can clam it. If you took a class to develop new skills, you can claim it.
You can claim 20% of your first $10,000 you paid toward tuition and fees in 2020 for a max of $2,000. You can claim this credit if your gross income is less than $59,000 or $118,000 jointly. If you owe no tax, you cannot get a refund on this.
Child Tax Credits
You can get a standard credit for $2,000 per child and $500 for a dependent. This is a tax credit which means it reduces your tax bill by the same amount. This can reduce your tax bill to zero and you can get a refund up to $1,400 using the child tax credit.
You qualify for this credit if you make less than $200,000 or $400,000 jointly.
Child Care and Dependent Tax Credits
You can get up to $2,000 per child or per dependent (16 years or younger). Use this credit to reduce your tax bill by the same amount. This can reduce your tax bill to zero and you can get up to $1,400 as a refund on anything leftover.
You qualify for this credit if you make less than $200,000 or $400,000 jointly.
While we're covering children tax credits, you can deduct up to $14,300 in adoption costs per child. Here are some interesting rules for deducting adoptions:
- You can't take the credit if you're adoption your spouse's children.
- Take the full credit if your child is special needs.
- You qualify for this credit if you make less than $214,500.
You can deduct medical expenses that haven't been reimbursed through your insurance or employer program. The amount of this deduction is no more than 7.5% of your gross income. Click here for “what kind of medical expenses are tax deductible”.
Health Savings Account
You can start a Health Savings Account and contribute up to $3,550 to be used towards medical expenses. You can choose to invest this money and use this money later in life for healthcare. When you use it for medical purposes, it's tax-free.
HSA's let you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. HSA funds generally may not be used to pay premiums.
Some health insurance companies offer HSAs for their HDHPs. Check with your company. You can also open an HSA through some banks and other financial institutions.
Home Office Deduction
If you use part of your home for business-related activity, the IRS lets you write off rent, utilities, taxes, repairs, maintenance and other expenses. Related: How to Start a Business Guide
Use Form 8829 to calculate expenses for business use of your home.
The IRS has two ways to calculate your home office deduction. The simplified version allows you to deduct $5 per square foot of your home that is used for business. (up to 300 square feet). The actual-expense method
Property Taxes and State Income Taxes
The State and Local Tax deduction AKA The Salt Deduction allows you to deduct up to $10,000 in state and local taxes. If you paid $10,000 in property taxes, you can deduct $10,000 on your return per year.
This was a new controversy because high tax states like Texas, California and New York easily exceed the $10,000 threshold which means you could be paying more in taxes than you bring in (which has forced people to sell their homes or move to cheaper areas).
Mortgage Interest Deduction
You can deduct mortgage interest up to $750,000 principal. The debt must be personal residence debt like a primary residence or a vacation home. Investment property is not eligible for this deduction.
What habits can help you grow your money?
Take a look at the list of deductions to see where you can make changes. For example, can you setup an auto investing account to invest just $125 per week into your Roth IRA? That will max you out at $6,000 per year.
Can you setup your HSA where you invest just $68 per week to help build your fund for medical purposes? Can you match your employer's 401k each month?
What I would do is take the total amount of your deductions above and divide them by 52 to see what your weekly contribution is. Then, set that up to auto-invest, auto-save, auto-transfer to help you reach your goals every single year.