End of Year Action Items – 2020 Edition

The past 12 months have brought significant tax changes including the CARES, Disaster, and SECURE acts, each with implications for retirement and tax planning.   In addition to providing action items to potentially help reduce your 2020 tax burden, the purpose of this post is to recap the financial planning implications of – and opportunities created by these acts. Many of the provisions of the acts are set to expire at the end of the year, particularly those within the CARES act.  Other legislation including changes made under the Tax Cut and Jobs Act (TCJA) is set to sunset in 2025, though under a Biden presidency, may be accelerated.  On that note, as we prepare for a Biden presidency, there may be significant tax reform legislation next year, which may lead to increased tax rates for many.  I’ll keep apprised of these changes and keep you posted as I learn more.

As we begin the final weeks of 2020 (please hold your applause) consider the following action items to potentially reduce your tax bill and improve your financial footing in 2021 and beyond.  While this list is not comprehensive, I’ve outlined some of the more common end-of-year strategies including some unique opportunities presented under the acts listed above.  Due to the changes under the various acts, I’ve changed the format from last year to be topic-based rather than last year’s life-stage based structure.

To evaluate your specific situation, I’d encourage you to reach out to your tax professional or schedule time with me by clicking here.

The Standard Deduction – The standard deduction for 2020 is $12,400 for singles and those filing separately with their spouse, and $24,800 for married filing jointly.  Those 65 and better pick up an additional $1300 for married and $1650 for unmarried individuals.  Those filers with itemized deductions close to their standard deduction should consider accelerating their itemized expenses into 2020 to get over (exceed) their standard deduction for the year.  Actions to accelerate itemized deductions include prepaying mortgage interest expense due in January 2021, prepaying state and local income and property taxes (note the $10,000 annual cap for married filing jointly), increasing charitable contributions for 2020 (with a plan to decrease your 2021 contributions) or contributing to a Donor-Advised Fund (more on that below).

IRAs/ROTH IRAs Contributions – Contributions for 2020 tax-year can be made until your tax filing in 2021.  Maximum contribution limits for 2020 remain at $6,000 for those under 50 and $7,000 for those wiser (50 and over).  If your income for the year was over $200K, it’s unlikely you’re eligible (based on Modified Adjusted Gross Income) to contribute to a ROTH IRA.  If you’ve done so, please contact me so we can fix this.  The SECURE act removed the age restrictions previously in place, so anyone with earned income, even those over 70.5 may now contribute to a traditional IRA, though there are restrictions in place and as always, whether you can deduct your contributions depends on a number of factors.

529 Contributions  – For those with children at or below college age may want to consider contributing to a 529 Plan.  While not Federally tax-deductible, many states (CO, notably) allow for a state-tax deduction. Contributions to 529 plans must be made by the end of the calendar year.

Retirement Accounts (IRAs, 401Ks, 403Bs, SIMPLE IRAs, etc)  –  The CARES Act eliminated RMDs for 2020 so those 70.5 and older are not required to take (taxable) distributions from their accounts.  Instead, consider taking what would have been required and rolling that taxable amount into a ROTH IRA to avoid future taxes on that money and insulate against a potential tax increase under a new administration.

Harvest Losses in Taxable Accounts – If you have taxable investment accounts held with Oak Street Investments at our custodian, we’ll discuss offsetting some gains and losses for existing holdings, if appropriate, and if it will allow us to better allocate your investments.  Note that given the significant selloff and subsequent rebound this year in stocks, many opportunities for tax loss harvesting were reviewed (and taken) earlier in the year.

Those with “Lower” Income than Usual –  If this is a particularly low income year for you, consider realizing some capital gains, potentially up to the next capital gains bracket.  Don’t forget about the 0% cap gains bracket for singles up to roughly $40,000 in income and for married filing jointly nearly $80,000…And that’s of taxable income, not gross income!  In short, if you have taxable accounts and your income is under these thresholds, consider selling some investments (taking some gains) and resetting your taxable basis.

Other strategies for lower income years include considering the impact of converting some or all of your traditional IRA (or in some cases where permitted, 401K) assets to a Roth IRA.  While the conversion is considered taxable, it will be done in a lower income year.

Charitable Contributions  – The Tax Cut and Jobs Act greatly increased the standard deduction, making it less likely that people will itemize their taxes.  As such, many people will not be able to deduct their charitable contributions.  However, the CARES act allows individuals to take a deduction of up to $300 above the line (i.e., even without itemizing). Here are some things to keep in mind:

• Over 70.5?  If you’re over 70.5 with IRAs, the best strategy is to use your RMD for a Qualified Charitable Distribution (QCD) as you do not need to itemize to take advantage of this.  Do not take your RMD then contribute it as that is not a QCD.  As previously mentioned, RMDs are not required in 2020, though QCDs are still a tax-advantaged strategy for charitable contributions.

• Got Stock?  If you have highly appreciated stock, this is almost always better than giving cash as you’ll get to deduct the fair market value (note you’ll need to itemize) and avoid capital gains taxes when you otherwise would have sold your stock.

• Donor Advised Funds (DAFs) –  The point of a DAF is to separate the timing of charitable contributions from the tax deduction.  In short, you get the deduction this year and can give money away for years to come from the fund.  I see this used to aggregate multiple years-worth of contributions to get over the itemized deduction hurdle in a given year.

Gifting Strategies – For 2020, the TCJA allows for a total of $11.58 million ($23.16 million for joint filers) to be transferred over the giftors life without gift (or estate) tax consequences.  Importantly, there is proposed legislation that would greatly reduce the maximum lifetime transfer limits (currently unified with the estate tax exclusion).  While there is little information at this time on whether such a proposal would pass and if so, when – consider whether it makes sense to gift (appreciated assets or otherwise) in anticipation of such a cut.  The greater your wealth, the more “risk” (read: a reduction in the limits above) of potential taxation.

There is also an annual exclusion of $15,000 to any individual, from an individual, under which you do not need to file a gift tax return, nor does this amount reduce the lifetime exemption outlined above.  Note that gifts to those under 24 and to some trusts have different rules and consequences, so I’d advise you to call me if you’re considering a gift of this nature.

Again, please feel free to reach out for more specifics or to discuss one or more of these strategies.