6 Smart Tax Strategies to Know in 2020

As the economy cycles, tax rates fluctuate, and major events impact the market, the importance of managing your tax burden as you make investment decisions stays the same. Each year the taxes you pay reduce the returns you receive from your investments, causing challenges that can prevent you from meeting your long-term income goals. Those in the highest tax brackets must take even more care when making investment decisions. They should consult with a trusted professional tax attorney about various tax strategies before making any decisions that could impact their taxes or investments. 

1. Contribute to Tax-Efficient Retirement Accounts 

Investing money in tax-efficient retirement accounts is a smart tax strategy because it can save you money on your current taxes and/or future taxes. The vast majority of retirement accounts are individual retirement accounts (IRAs) and 401(k) accounts. Each type of account can be traditional or a Roth account and contributions have a different impact on current and future taxes. 

Traditional Accounts 

● Contributions to traditional IRA accounts are tax-deductible. 

● Contributions to traditional 401(k) plans are made prior to taxation, reducing current taxable income. 

● Both traditional plans are subject to yearly contribution limits and those who have a traditional IRA may also have limits related to their participation in an employer-sponsored plan. 

● Both traditional plans allow you to grow your investment while you defer taxes until you withdraw after retirement. 

Roth Accounts 

Those who invest in a Roth IRA or Roth 401(k) are also subject to yearly and employer-related contribution limits. The biggest difference between Roth accounts and traditional accounts is that Roth accounts offer tax-free growth potential because investors make contributions with after-tax dollars. As long as an investor has had a Roth account for at least five years and does not withdraw money before age 59 and a half, the initial investment and gains are tax-free. 


Another potential type of retirement accounts is tax-deferred annuities, which typically don’t have contribution limits, nor must they comply with age-related distribution rules. The insurance companies who issue annuities have the right to limit contributions, so it’s imperative that you consult with your tax attorney if you set up an annuity. 

2. Contribute to Multiple Types of Accounts 

You have no way of knowing whether your future tax rate will be lower or higher than your current tax rate. A smart tax strategy that allows you to hedge your investments is to diversify your investments into different accounts. This is done by investing in both traditional and Roth accounts, so you can take advantage of tax-deferred and tax-free growth.

Once retired, traditional IRA withdrawals are taxable income that allows you to take tax deductions. You can withdraw enough money to take advantage of tax deductions and withdraw additional money from your tax-free Roth account. Brokerage accounts, which are taxable, provide another option for diversification. Striking a balance between tax-deferred and tax-free growth allows you to grow your wealth faster by keeping more of your money invested. 

3. Choose Tax-Efficient Investments 

When you invest money outside retirement accounts and brokerage accounts, you want to choose investments that are tax-efficient. If you funnel large sums into investments that create a large tax burden, you significantly reduce your potential returns. For example, if you invest in municipal bonds, you will find they are typically tax-free. Other tax-efficient options include mutual funds with managers who actively try to save you money through tax efficiency. You may also consider investing in publicly traded funds that track long-term growth. 

4. Avoid Capital Gains Tax by Holding Your Investments 

In most cases, when you are ready to sell a stock, you should sell. Yet, depending on the amount of your tax burden, you may want to make an exception and hold your stock for at least one year. Any profits you make from the sale of securities get taxed at regular income rates if you sell them in under a year. This not only includes stocks but other tradable securities such as options and corporate bonds.

Once you have held your investments for a year, you must pay the long-term capital gains tax rate. This rate changes, but currently the rate for most investors is 15 percent and those in the highest earnings brackets must pay 20 percent. In some rare instances, the IRS requires investors to pay more than 20 percent. Depending on your situation, it can be a smart tax strategy to wait and sell securities after they fall under the long-term capital gains tax rate. An experienced tax attorney can help you make the right decision for your circumstances. 

tax strategies
Cropped shot of a couple going over their finances together at home

5. Harvest Your Tax Losses 

Unfortunately, not all investments will make you money, but in some cases, you can use your losses to reduce your tax bill by a smart tax strategy known as tax-loss harvesting. Keep in mind that you can only use tax-loss harvesting with taxable accounts, not with IRAs or 401(k)s. Tax-loss harvesting allows you to offset your gains with any investment losses you have in a year. If your losses exceed your gains, you can use them to offset up to $3,000 of earned income. Losses that are greater than $3,000 can be carried forward to future tax years. 

6. Donate to Reduce Tax Liability 

Under federal tax code, those who itemize taxes can deduct the value of charitable gifts from their taxable income as long as they follow IRS guidelines concerning limits. Although you can surely donate money, a smart tax strategy is to donate appreciated stock, real estate, or business interests. Donating stocks to a public charity allows you to take a fair market value deduction, which might even eliminate capital gains tax liability. The same is true when contributing real estate, shares, or privately held business interests in an LLC or LP. 

Executing These Tax Strategies

Contact Bogart Wealth today to learn how to apply these smart tax strategies and more to your personal investment portfolio. Our team has been guiding clients for more than three decades, and we know how to help grow and manage wealth. 

Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com

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