This year has been challenging for everyone. Review the below tax planning ideas to potentially make a final move in reducing your tax bill for 2020. Everyone’s situation is different, but our tax professionals can answer your questions and/or customize a personalized year-end plan to take advantage of potential opportunities.
1.Pick-up capital gains if in a low tax bracket for 2020:
The end of the year is a good time for some people to sell stocks that have appreciated significantly in value. This can be a particularly good strategy for those in the 10% and 12% tax brackets since their capital gains tax may be zero. The stocks can then be repurchased, which resets the basis and minimizes the amount of tax to be paid on future gains. Just be careful not to violate the wash-sale rule, which would disallow the deduction. This rule states you cannot purchase the same or a substantially similar stock within 30 days before or after the sale.
2.Take a hardship withdrawal, if needed:
Those who have been affected by the COVID-19 pandemic can avoid paying a 10% penalty on distributions from retirement funds prior to attaining age 59 ½. The IRS has also granted the ability to pay off the income tax on the withdrawal over a three-year period.
Eligible individuals include those who have been diagnosed with Covid-19, have a spouse or dependent diagnosed, or are financially impacted by the pandemic because of quarantine, unemployment, reduced hours, having a job offer rescinded or start date for a job delayed, due to COVID-19.
3.Cancel your 2020 RMD (required minimum distribution):
Retirees who have a traditional IRA must make minimum distributions once they reach age 72. The RMD has been waived for tax year 2020. If you did not cancel your distribution prior to Aug. 31, 2020, talk to your financial advisor to see if you are still eligible to roll over the distribution or to re-characterize it as coronavirus-related.
4.Charitable Contributions:
Any individual who does not itemize their deductions, is allowed up to $300 in deductions for charitable contributions given in cash before the end of 2020 to a qualified charitable 501(c)(3) organization(s).
The CARES Acts temporarily removes the cap for cash contributions made to qualified charities previously limited to 60% of a taxpayer’s adjusted gross income (AGI), and allows these taxpayers to deduct contribution amounts up to 100% of their AGI. It is important to note that the CARES Act only provides these tax benefits for cash donations to qualified 501(c)(3) public charities and completed before 12/31/20.
5.Convert money from a traditional to Roth IRA, if your tax bracket is lower than planned at retirement age:
Saving money in a Roth IRA is best when you expect your tax rate to be lower when you will be taking distributions out of the account rather than at the time you are saving the money in a Roth. Since tax rates are uncertain right now, but most likely to increase in the future, having some after-tax savings in a Roth might assist in balancing the tax effect of retirement.
6.Financial gift(s) tax exclusion:
This year allows for individual personal gifts of up to $15,000 as a tax exclusion. If you are married, you can double this tax benefit by each gifting up to $15,000 to one or multiple recipients. The maximum gift tax exclusion to one individual from a married couple is $30,000. These yearly tax exemptions do not count toward your lifetime exemption limit.
Note: certain tuition and/or medical expenses you pay for someone might be allowed as tax-free contributions.
7.Donate appreciated stock to qualified charitable organizations:
If you are planning to itemize your deductions, it’s important to be smart about how you contribute to organizations that you care about. If you have appreciated assets that you’ve held for over a year, you can deduct the full fair market value if you donate them to a 501(c)(3) nonprofit organization. These charitable gifts can include common stocks and bonds, mutual funds and other long-term appreciated securities.
8.Harvest tax losses to offset capital gains (consult with your financial advisor):
Year-end is the time to sell investments not performing to create losses to offset gains on other stocks or to apply up to $3,000 in losses to your regular income taxes.
Note: avoid the wash-sale rules disallowing the deduction. You cannot purchase the same or a substantially similar stock within 30 days before or after a sale.
9.Max out retirement contributions:
If you’ve been resistant about funding your employer-sponsored 401(k), 403(b) or other tax-deferred retirement account, do yourself a favor and increase your contributions. The money you put in these accounts reduces your taxable income for the year, which reduces your tax bill. It isn’t taxed until you withdraw it. For 2020, contribution limits are $19,500, plus $6,500 in catch-up contributions if you’re 50 or older. If you have an IRA through a broker or bank, contribution limits for 2020 are $6,000 plus $1,000 in catch-up contributions.
10.Review your estate plan and your beneficiary designations:
Beneficiary designations won’t affect your taxes now, but they do affect the taxes of your heirs in the future. This year is a great time to review your beneficiaries and make any changes you feel are needed. Why is that important? Down the road, it will help minimize the taxes your beneficiaries and heirs pay on your assets after you die.
Please schedule a meeting with your tax advisor if you feel any of the above items apply to you and require further discussion.
