Year-End Income Tax Planning Tips
As a very eventful 2020 comes to a close, we would like to share the following tax tips to consider before year-end:
1. Maximize your retirement savings
- The contribution limit on an IRA or Roth IRA is $6,000 in 2020 with an additional catch-up contribution of $1,000 for taxpayers age 50 and over.
- The 401k plan contribution limit is $19,500 with an additional contribution of $6,500 for taxpayers age 50 and over.
*Tax deduction of IRA contributions are subject to income limits as is the ability to make Roth IRA contributions.
2. Review Capital Gains and Losses
- Determine if tax-loss harvesting makes sense this year. You may claim up to $3,000 of losses in excess of your gains.
- Note: Joint filers with taxable income of less than $80,000. may want to recognize long-term capital gains this year as their tax rate is 0%.($40,000 for single or married filing separately.)
3. Review Itemized Deductions
- Most taxpayers will not itemize deductions due to the increased Standard Deduction of $24,800 for joint filers and $12,400 for single or married filing separately.
- Charitable contributions made by year end can be valuable tax deductions. Consider gifting appreciated assets instead of cash. Gifting appreciated stock can save capital gains tax and provide a charitable contribution deduction.
4. Qualified Charitable Contribution (QCC)
- The CARES Act has removed adjusted gross income limitations on certain cash contributions. Qualified contributions are those that are:
- Are made in cash
- Where a charitable deduction is otherwise allowed
- Made directly to an eligible charity (not a donor advised fund).
5. Roth Conversions
- This might be a good time to take advantage of the lower tax rates and consider converting all or part of an IRA to a Roth IRA.
- The amount converted is treated as taxable income, so it's important to understand what tax bracket you are in for 2020.
- There are no income limits on Roth IRA conversions, nor is there a limit on how much you can convert.
6. Coronavirus-Related Distributions
- Clients who are "qualified individuals" under the CARES Act can withdraw up to $100,000 of coronavirus-related distributions(CRDs) from IRAs or company plans
- CRDs in 2020 are not subject to a 10% early distribution penalty and taxable income may be spread over a three-year period
7. 2020 Required Minimum Distributions (RMDs) are Waived
- RMDs are waived for 2020 but you may still want to consider taking distributions by 12/31 to take advantage of the current tax brackets and to maximize them
- This includes taxpayers in the 10%, 12%, 22% and 24% tax brackets