COVID-19's U.S. impact has been much more than health-related. The pandemic has also sent unemployment levels through the roof, shuttered small businesses left and right, and plunged our economy into a recession. And Americans are hurting as a result. In fact, in a new Jackson Hewitt survey, 33% of Americans predict they'll have less income in 2020 compared to 2019 after all is said and done.
Clearly, that's not a great spot to be in. The good news, however, is that a few smart tax moves on your part could put more money back in your pocket. Here are a couple to consider.
1. Contribute more money to a tax-advantaged savings account
At a time when your income is sluggish, parting with more of it may seem undesirable. But actually, there are ways you can pay yourself and save money on taxes at the same time, thereby helping to compensate for a lower income level on the whole.
First, try ramping up your 401(k) or IRA contributions. If you're saving in a traditional retirement plan as opposed to a Roth account, the money you contribute goes in tax-free, which means the IRS can't tax you on that income.
Another option is to put more money into a health savings account, or HSA, if you're able to participate in one. Eligibility for an HSA hinges on being enrolled in a high-deductible health insurance plan, which is currently defined as an individual deductible of $1,400 or more or a family-level deductible of $2,800 or more.
The great thing about HSA funds is that they don't expire, so you can carry that money forward and use it for future healthcare needs. At the same time, the money you contribute gets the same treatment as money that goes into a traditional 401(k) or IRA, which means you'll shield more of your income from the IRS.
2. Capitalize on losing investments
The stock market has been volatile since COVID-19 started spreading in the U.S., and usually, leaving your portfolio alone is a good way to avoid locking in losses. But if you have a specific investment in your portfolio that's doing really poorly, unloading it at a loss can benefit you in two ways.
First, by liquidating that investment, you'll free up cash that you may need to cover expenses in light of the hit your income has taken. Secondly, you'll get to take advantage of a strategy known as tax-loss harvesting. When you lock in losses on an investment, you can use those losses to offset capital gains, thereby avoiding taxes on them.
Don't have gains to offset? You can then use your investment loss to cancel out up to $3,000 of your regular income, thereby reaping savings.
Lower taxes can help when your income declines
Grappling with any amount of income loss is far from easy, but if that's the situation you're in or expect to be in, see if a few smart tax moves could help make up for it. Also, don't hesitate to seek help if your tax situation is complicated or you're unsure which strategies are right for you. As Mark Steber, Chief Tax Information Officer for Jackson Hewitt, says:
2020 is a year full of life changes, and life changes usually impact income. With the widespread layoffs, furloughs, unemployment, and stock market losses, we expect to see more complex tax situations for most taxpayers. Both a mid-year checkup and a year-end checkup are certainly recommended this year to ensure that taxpayers have time to prepare for what's bound to be an unprecedented tax year for many.