How To Reduce Your Tax Bill for 2020

Chintan Pabari

Apr 21, 2021

How To Reduce Your Tax Bill for 2020 image

For high-income earners in the Bay Area, regularly changing tax legislation can be a complex landscape to navigate. Without an in-depth understanding of these changes, you may be under-withholding, and could end up owing thousands of dollars in taxes, unwanted penalties and fees.

Tax season is the opportune time to increase your understanding of how to best protect your wealth with a few smart tax optimization strategies.


Each year, high-income earners part with a significant portion of personal wealth to pay their tax liabilities. Whether you are self-employed, running your own business, or working for a Bay Area tech company, drawing a substantial annual income will likely move you into one of the highest tax brackets. But this is not the only way you could end up owing more in taxes.

For many high-income earners, investment earnings can significantly increase the exposure to additional tax liabilities. This can become a burden if you are drawing regular income from dividends, interest, and royalties. Even owning real estate that earns rental income can leave you with a higher tax bill. Capital gains from the sale of assets like stocks and properties can also add to this. Equity compensation offered by tech companies may expose you to an unexpected tax bill as well. This can happen when your employer withholds taxes at a lower percentage than required, which could lead to an underpayment penalty.

If you have recently come across a substantial inheritance, then you might be subject to Estate taxes. California does not impose Estate and Inheritance taxes, so as a Bay Area resident, you do not need to worry about them for now. But the federal tax for estates valued above $11.7 million may still apply. Even those expensive gifts you bought for family and friends are taxable once their total value exceeds the IRS threshold.


Due to the frequent updates and changes to tax regulation and policy, it can be overwhelming and difficult to keep pace. Many high-earners needlessly pay more than they should with their tax returns each year. If you suspect you are doing the same, it’s not too late to reduce what you owe. Here are a few sensible last-minute strategies to protect your hard-earned savings.


Contributing to an Individual Retirement Account, better known as an IRA, is one of the easiest ways to reduce your taxable income. You can contribute up to $6,000 to a traditional IRA, or $7,000 if you are above 50 years of age. This is an excellent strategy to set aside savings for retirement while lowering your current tax bill at the same time.

Keep in mind, however, that you might not be eligible for this deduction if a workplace retirement savings plan covers you or your spouse. Further, tax regulations limit the deduction high-income earners can claim from retirement savings contributions.

If both you and your spouse are not part of a company plan, then you may benefit from a spousal IRA with a joint tax filing. This means you can open two IRA accounts and defer up to $12,000 in total from the taxable income. And if you’re above 50, it could increase to $14,000. This contribution is possible, even if only one of you is working.


A health insurance account or an HSA is an excellent tax-advantaged savings option to reduce part of your tax burden. You can contribute up to $3,600 (up $50 from tax year 2020) for individual coverage and $7,200 (up $100 from tax year 2020) for family coverage under a qualifying high deductible plan. If you are 55 years or older, then you can add an extra $1,000 to this amount. And it will all count as tax-deductible contributions when you are filing your tax returns.

An HSA is highly flexible and versatile, too. For instance, there are no deadlines to withdraw funds and your savings grow tax-free. Withdrawals are also tax-free, as long as you use them for eligible medical expenses. You can even invest part of your HSA savings in financial products like exchange-traded funds or mutual funds.


If you are a self-employed professional or an entrepreneur with just a handful of employees, then contributing to a simplified employee pension or a SEP IRA could be an attractive savings option. Similar to a traditional IRA, your SEP contributions yield dollar-for-dollar tax deductions.

But several unique features provide a SEP IRA an edge over its traditional counterpart. The most remarkable benefit is the higher contribution cap. You can place up to $58,000 (up from $57,000 in 2020) or 25% of your net income, whichever is less, in a SEP. That is nearly 10 times the threshold set for a traditional IRA. But if you are a business owner, bear in mind that you’ll need to contribute the same percentage to the SEP accounts for both you and your employees.


Last-minute optimizations can help reduce your tax burden by a reasonable amount but they cannot fully protect your income, savings, and assets, which is why it is important to devise sensible strategies that can help avoid unnecessary tax liabilities. Examples include preplanning charitable contributions and tax loss harvesting strategies which can significantly lower your tax liability for any given year.

Tax planning is highly individualized: each Bay Area resident has unique income streams, investments, and future plans. Therefore, you need a strategy that is customized to your specific requirements. It is a difficult task to take up on your own, which is why opting for tax planning services from a firm like Summitry, can go a long way in minimizing the impact of high taxes on your wealth. Your tax preparer generally looks at your tax situation for the previous year and is therefore looking backwards. Summitry complements your CPA by looking forward and planning ahead, while considering a multi-year planning approach to ensure that you are utilizing all the tax strategies available to you. Summitry can help you navigate complex tax policies, keep you up to date on the changing legislations, and devise customized, tax-optimizing strategies with a holistic approach to wealth management.

Reach out to us to learn more about how Summitry can help you with long-term tax planning, to save and prepare for your future.





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