Innovative Ways to Reduce Taxable Income

(4 minute read)

Did you know you can sell all or a portion of a life insurance policy, even term insurance?

With tax time approaching, many people are thinking about how to lower their 2020 tax bill through deductions or other strategies. While some of these strategies require a little advance planning, they are all worth discussing with a CPA or financial advisor if you think they could help you this tax season, or even next year. Here are seven ways to legally reduce your taxable income, and maybe even find new benefits in your life at the same time.

Contribute to a Retirement Account

Contributions to both your employer-sponsored 401(k) and a personal IRA are tax-deductible. 401(k) contributions must be made by the end of the calendar year to be deducted from that year’s income, but IRA contributions can be deducted as long as they are made before the filing deadline. The retirement contribution limits change a little every year, so be sure to check the most recent numbers to figure out how much you can invest for retirement.

Open a Health Savings Account

Similar to a retirement account, the funds contributed to a personal health savings account are tax-deductible, while interest earned on the account grows tax-free. To have a health savings account, you must participate in a qualified high-deductible health plan. The amount deposited into the account rolls over year-to-year, and can be used at any time to cover qualified expenses like health insurance deductibles, medication, copays, and more.

Take a Home Office or Side Business Deduction

If you had to establish a more robust home office or start a side business in 2020, the good news is this can equal tax deductions. Using Schedule C, you can even deduct the expense of the portion of your home that is used exclusively for an office. That means if a spare room is used just as an office, it would qualify, but your living room sadly would not. As far as your side hustle, business expenses like mileage, office supplies, travel, and even your health insurance premiums may be tax-deductible as a self-employed individual.

Deduct Self-Employment Taxes

Self-employment can come along with what seem like some hefty additional taxes. This is because in addition to income tax, businesses are assessed an additional 13.5% tax to help pay for Social Security and Medicare. While established businesses can distribute this cost among all their employees, for a self-employed person, there is only one place for the buck to stop. This is why the IRS allows self-employed individuals to deduct 50% of their Federal insurance contributions from their personal income for the year.

Deduct Mortgage Insurance Premiums

if you recently purchased or refinanced a home and have less than 20% equity, it’s likely you are paying for mortgage insurance. While there was a brief period that this deduction was taken away by the Tax Cuts and Jobs Act, homeowners can once again deduct the cost of their mortgage insurance from annual income, as of the end of 2019. Private mortgage insurance, or PMI, could range anywhere from 0.5% to 5% of the original mortgage amount, paid each year.

Make Charitable Contributions

If you are already in the habit of itemizing your deductions, or plan to start with 2020’s taxes, charitable contributions are a great way to see the savings add up while you are giving back at the same time. Everything from mailing a check to your favorite cause to taking old clothes and items to Goodwill can be added up and deducted from your taxable income. Just remember to get a receipt for every donation.

Avoid and Reduce Capital Gains Tax

If you have experienced a capital gain like selling a home, business, or stocks, there are many strategies to offset this income on your taxes, depending on your unique situation. Other than retirement account investments and donations, you could also establish a trust or make gifts to family members. Captial losses that you took on other investments or property can offset your gains by as much as $3,000 a year, while homeowners can exempt anywhere from $250,000-$500,000 of their home’s value every two years. All these strategies should be discussed with a financial professional to be sure they are well-understood before proceeding.

Especially approaching or during retirement, keeping as much of your income in your pocket as possible is an important part of managing finances. When additional liquidity is needed or taxes hit your nest egg harder than expected, you might look around at other assets in your portfolio for creative ways to increase your income. This is when a life settlement might be an ideal option.

Did you know you can sell all or a portion of a life insurance policy, even term insurance? Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.

 

Leo LaGrotte
Life Settlement Advisors
llagrotte@lsa-llc.com
1-888-849-0887

Get in touch with Life Settlement Advisors today to take the first step toward converting your policy into cash.
Life Settlement Advisors
Leo LaGrotte
llagrotte@lsa-llc.com
At Life Settlement Advisors, we strive to be a voice of confidence and assurance for our clients. Our goal is to educate you about the life settlement process so you can make an educated decision about whether it is right for you.

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