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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

Tax planning is a year-round exercise that requires active participation.  We recommend that you consult with your tax advisor to determine how these planning considerations may benefit you.