As year-end approaches, it’s a good time to think about planning moves that may help lower your tax bill for this year and beyond.

2020 year-end planning takes place during the COVID-19 pandemic, which has widely affected personal and business finances.

Year-End Planning: Tax Savings Checklist

These are just some of the year-end actions that can be taken to save on your taxes. Below is a quick list of items to consider for income tax, estate and gift tax, retirement, investment, and other financial planning.

Consider Gifting

  • Make use of annual exclusion gifts ($15,000 per donee, $30,000 married couple) to help save on potential future estate taxes.
  • Capitalize on the unlimited gift exemption for direct payment of tuition and medical expenses.
  • Consider gifting to a 529 plan by year-end if saving for a child’s or grandchild’s education.
  • Review lifetime gift and GST gifting opportunities to use additional applicable exclusion and exemption amounts.

Retirement Contributions, Loans & Trusts

  • Update pre-tax and Roth contributions to retirement accounts for 2021.
  • Consider intra-family loans and opportunities to leverage the low-interest-rate environment.
  • Revisit grantor retained annuities trusts (GRATs) for use in the current low-interest-rate environment.

Review & Evaluate

  • Review your various insurance policies and confirm whether the amount of coverage is still adequate.
  • Review beneficiary designations and update, as necessary.
  • Confirm that you have spent the entire balance in your Flexible Spending Accounts and set 2021 contribution amounts.
  • Review your investment portfolio and target asset allocation. Confirm whether you are within the targeted ranges for each asset class.
  • Review quarterly estimated tax payments and assess any liquidity needs.
  • Evaluate progress towards financial goals.
  • Update your accounting team about any major changes in your life, like marriages or divorces, births or deaths in the family, employment changes, and significant planned expenditures (real estate purchases, college tuition payments, etc.).

New 2020 Tax Rules

New tax rules have been enacted to help mitigate the financial impact of COVID-19. Some notable changes that should be a part of tax planning for 2020 are:

  • Elimination of required retirement plan distributions, and
  • Liberalized charitable deduction rules.

Major Tax Changes from Recent Years

Many tax changes from recent years generally remain in place, including:

  • Lower income tax rates
  • Larger standard deductions
  • Limited itemized deductions
  • Elimination of personal exemptions
  • An increased child tax credit
  • A reduced alternative minimum tax (AMT) for individuals
  • Limits on interest deductions

Despite the lack of major year-over-year tax changes, time-tested approaches still work for many taxpayers.

These trusted approaches to minimize taxes include:

  1. Deferring income
  2. Accelerating deductions
  3. Collecting expenses into this year or next

Year-End Tax Planning Moves for Individuals

Consider Postponing income until 2021 and accelerate deductions into 2020

This will make sense for you if it enables you to claim larger deductions, credits, and other tax breaks for 2020 that are phased out over varying levels of adjusted gross income (AGI).

These include:

  • Deductible IRA contributions
  • Child tax credits
  • Higher education tax credits
  • Deductions for student loan interest

Postponing income is also desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.

Higher-income earners

You must be wary of the 3.8% surtax on certain unearned income.

Long-term capital gain from sales of assets held for over one year

This is taxed at 0%, 15%, 20%, or 28% depending on the taxpayer’s taxable income and type of asset.

If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate.

Roth IRA Conversion

If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money into a Roth IRA in 2020 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2020, and possibly reduce tax breaks geared to AGI.

Required Minimum Distributions Waived for 2020

Required minimum distributions (RMDs) that usually must be taken from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have been waived for 2020.

This includes RMDs that would have been required by April 1 if you hit age 70½ during 2019.

Qualified Charitable Distributions

If you are age 70½ or older by the end of 2020, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making 2020 charitable donations via qualified charitable distributions from your IRAs.

The decisions you make each year with your taxes and personal finances have a lasting impact. For guidance when making these decisions, reach out to our team at Smith Patrick CPAs.

More Information

If you need help, reach out to us at 314-961-1600 or schedule directly here to discuss your situation.

David Smith helps businesses and individuals develop smart business practices for tax and accounting advantages as the president of Smith Patrick CPAs. He serves on MOCPA’s Legislative Policy Task Force and MOCPA’s Firm Leadership Committee. Reach him at 314-961-1600 or schedule directly here.

About Smith Patrick CPA

Smith Patrick CPA is a St. Louis-based, family-owned CPA firm dedicated to providing personal guidance on taxes, investment advising and financial services to small businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to businesses, non-profits, individuals and government agencies in St. Louis and the surrounding areas. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.