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3 Tax Strategies You Should Know About

As if your hard-earned income wasn’t taxed enough, if you receive Social Security and Medicare benefits, you may be subject to additional levies! While there’s no way to avoid paying taxes, there are strategic ways to lower your tax bill. Protect your income with these three essential tax strategies.

Strategy #1: Invest in municipal bonds.

When you purchase a municipal bond, you are essentially lending money to a state or local government entity for a set number of interest payments over a predetermined period. Once the bond reaches its maturity date, you will be repaid the full amount of the original investment. As a “thank you” for the loan, interest income from eligible municipal bonds is exempt from federal taxes.  

Municipal bonds typically have a lower default rate than corporate bonds. For example, municipal bonds from 1970 to 2019 had a default rate at 0.1% versus 2.28% for global corporate issuers. Here’s the downside, municipals typically pay lower interest rates. However, the higher tax-equivalent yield from municipals tends to outweigh the lower interest rates.

Strategy #2: Max Out Retirement Accounts and Employee Benefits

Contributing to qualified retirement and employee benefit accounts with pretax dollars can exempt some of your income from taxation and defer income taxes on other earnings. In 2020 and 2021, your taxable income can be reduced for contributions up to $19,500 for a 401(k) or 403(b) plan. So, if you make $100,000 in 2020 or 2021, you can contribute $19,500 to a 401(k) which would reduce your taxable income to $80,500.

No workplace retirement plan? No worries. You can still get a tax break by contributing up to $6,000 ($7,000 for individuals 50 years and older) to a traditional individual retirement account (IRA) in 2020 and 2021.

In addition to retirement plan contributions, many employers offer a variety of fringe plans that allow employees to exclude income contributions or benefits received. Some of these plans include flexible spending accounts, educational assistance programs, adoption expense reimbursements, transportation cost reimbursements, group-term life insurance up to $50,000, and at an executive level, deferred compensation agreements.

Strategy #3: Seek out long-term capital gains.

Investing wisely in stocks, mutual funds, bonds, and real estate is a component to growing wealth. Another benefit? The favorable tax treatment for long-term capital gains. If you hold a capital asset for longer than one year, depending on your income level, you will enjoy a preferential tax rate of 0%, 15%, or 20% on the capital gain. If the asset is held for less than a year before selling, the capital gain is taxed at regular income rates.

In 2020, married couples who filed jointly will pay 0% on their long-term capital gains if their taxable income falls below $80,000 ($40,000 for single individuals). In 2021, the zero-rate bracket for long-term capital gains applies to taxable income up to $80,800 for married couples and $40,400 for single individuals.

Maggi Tax Advisory & Financial Group can help lower your tax bill!

With strategic planning, Maggi Tax Advisory & Financial Group can help you protect your income by lowering your tax bill. To learn about our financial services, please call our Hillsborough office at (813) 850-0131 and our Pinellas/Pasco office at (727) 351-6168.


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