You still have time in 2020 for tax planning that will save you money. Here’s how
With only a few days left this year, there are still some “last minute” tax planning moves to consider in order to potentially trim a 2020 tax bill and take advantage of sound financial planning strategies. Consider these:
Donate to your favorite charities
The CARES Act enables taxpayers who take the standard deduction to also take an additional $300 tax deduction in 2020 for gifts to charity. This deduction is allowed for cash donations but not for contributions of property, such as clothing or household items. However, if you itemize your deductions, you can’t take the $300 CARES Act deduction. The $300 deduction is per household, so it isn’t doubled for joint filers, but still provides an incentive to benefit charities when they need it the most.
For taxpayers thinking about making greater charitable contributions, in 2020 only, the CARES Act also allows large donors to give up to 100% of their adjusted gross income (AGI) to charity, but only 30% of AGI can be donated property (versus cash), and no more than 60% of AGI goes into a donor-advised fund. Act fast: it’s a great opportunity to support worthy causes and lower your tax bill for the year.
Deadline: December 31, 2020
Revisit tax estimates for 2020 to avoid penalties
The CARES Act waived the requirement to take Required Minimum Distributions from IRA accounts in 2020. However, for taxpayers who relied on those distributions to pay their taxes via tax withholdings, if they have other sources of taxable income, they may come up short paying to the IRS what they owe for 2020 taxes, making them in danger of incurring tax penalties. Penalties can be avoided if 2020 withholding or estimated tax payments equal at least 90% of the 2020 tax liability, or 100% of the tax owed for 2019. There is still time to make that last estimated tax payment by January 15, 2021. Note: penalties don’t apply if the total tax bill is expected to be $1,000 or less.
Deadline: January 15, 2021
Maximize Health Savings Account (HSA) contributions
If you have an HSA-qualified health insurance plan, you can lower your taxes by contributing the maximum allowed into your HSA (generally $3,550 for individual coverage or $7,100 for a family, plus a $1,000 catch-up contribution if age 55 or older). Many HSA contributions are made through payroll, but you can also contribute directly to your account to ensure you contribute the maximum. In addition to providing a tax deduction, HSA dollars are yours to keep and use — even if you switch jobs or retire.
Deadline: April 15, 2021
Consider “harvesting” capital losses
Review your investment portfolio one last time to realize any additional capital gains and losses for the year. If you find yourself with net realized capital losses for the year, they can only reduce your ordinary income by $3,000, with the rest carried over to future years. If you expect to be in a higher tax bracket next year, it may be better to realize capital gains this year, or carry a capital loss into 2021 to help offset capital gains next year.
Deadline: December 31, 2020
Reduce future estate taxes by gifting early
If you are looking for ways to reduce your future estate taxes, don’t forget that you can gift up to $15,000 per year to as many beneficiaries as you would like without paying a gift tax or decreasing your lifetime estate tax exclusion amount. This is a great way to gift your wealth each year without triggering a tax impact.
Deadline: December 31, 2020
Tax planning should be a year-long process, but there’s still time to realize the benefits listed above – if you act fast. Happy New Year!
Karin Grablin is with SRQ Wealth, One N. Tuttle Ave., Sarasota, 34237, 941-556-9004. www.srqwealth.com. Securities offered through Cetera Advisor Networks LLC, a Broker Dealer, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity. This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.