Year-end Tax Strategies to Consider Now

Whether you anticipate your income taxes to increase next year due to higher earnings or changes due to tax legislation, consider the following before December 31.

To offset capital gains:

  • Harvest your losses by selling taxable investments.
  • Harvest your gains by selling taxable investments if you have capital loss carryovers or year-to-date losses for the current year. (Beware the IRS “wash sale” rule.)

Defer income and accelerate deductions:

  • If possible, defer income and the sale of capital gain property until 2021 or later to postpone taxable income to the following year.
  • Bunch itemized medical expenses in the same year in order to meet the threshold percentage of your adjusted gross income to claim such deductions.
  • In December, make your January mortgage payment (i.e. the payment due no later than January 15) so that you can deduct the interest on your 2020 tax return.
  • If you have concerns that you may be subject to the Alternative Minimum Tax (AMT), seek professional tax guidance before deferring income or accelerating deductions, as your AMT status could limit your ability to benefit from these actions.
  • For 2020 only, consider not taking your RMD (CARES Act provision) if you are in a higher income tax bracket in 2020 than you expect to be in 2021 or future years.

Seize retirement planning opportunities and avoid missteps:

  • Maximize your IRA contributions. You may be able to deduct annual contributions of up to $6,000 to your traditional IRA and $6,000 to your spouse’s IRA. 
  • If you are 50 or older, take advantage of catching up on IRA contributions and certain qualified retirement plans. You may be able to contribute and deduct an additional $1,000.
  • Required Minimum Distributions are suspended for 2020 under the CARES Act but consider whether to take your RMD if you anticipate being in a higher tax bracket in future years.
  • Consider increasing or maximizing your 401(k) and retirement account contributions. 
  • Consider contributions to a Roth 401(k) plan (if your employer allows and you are in a lower income tax bracket now than you expect to be in the future).
  • Avoid mandatory tax withholding by making a direct rollover distribution to an eligible retirement plan, including an IRA. (Avoid taking IRA distributions prior to age 59½ or a 10% early withdrawal penalty may apply.)
  • Consider setting up a Roth IRA for each of your children who have earned income.
  • Consider converting from a traditional IRA to a Roth IRA if in a low marginal income tax bracket. (Partial Roth IRA conversions are permissible.)
  • If you have been impacted by the COVID-19 pandemic as defined by the IRS, you may be eligible to take a COVID-19-related distribution from an eligible retirement plan. (The deadline for taking such a distribution is December 30, 2020, and you may withdraw up to an aggregate limit of $100,000 from all eligible plans and IRAs.) 
  • If you have business losses that flow through to your individual tax return in 2020, consider a Roth conversion or harvest capital gains to create income that is offset by the business loss.

Gifting and charitable strategies:

  • Consider making gifts of up to $15,000 per person and use assets likely to appreciate.
  • Make a charitable donation (cash or even old clothes) before the end of the year.
  • Use appreciated stock rather than cash when contributing to charities. 
  • If you are over 70½ in 2020 and would like to make a donation to charity from your IRA, you can donate up to $100,000 each year directly to qualified charities using a Qualified Charitable Distribution.
  • Set up a donor-advised fund for an immediate income tax deduction and provide immediate and future benefits to charity over time.
  • Consider “bunching” several years of charitable contributions into one year with a gift to a donor-advised fund to make your contributions more tax-efficient.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on as, specific tax, legal or accounting advice. Each individual’s situation is unique and may require customized advice.  We recommend that you consult your own tax and accounting advisors before engaging in any transaction.  Please contact Robert M. Birnbaum, Esq., or Carolyn M. Glynn, Esq. if you are interested in learning more about this or other estate planning topics