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Year-End Tax Planning Opportunities

Year-End Tax Planning Opportunities

December 01, 2020

Tax planning is an integral part of a comprehensive financial plan designed to help you meet multiple goals and priorities and keep more of what you earn from your various income sources and investments. While tax planning is a year-round activity, no time is more critical than the end of the year to make sure you’re taking advantage of opportunities to manage your tax burden. That’s especially true this year, thanks to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a significant economic aid package signed into law in March 2020.

The CARES Act provides an opportunity for those subject to required minimum distributions (RMDs) to waive them this year, which can substantially reduce the amount of your income that is subject to taxes in 2020. It also provides a unique opportunity for those who will take the standard deduction to take an above-the-line deduction of up to $300 for individuals ($600 for a married couple filing joint returns) for cash donations to charitable organizations. For those who will itemize, the CARES Act removes the 60% of adjusted gross income (AGI) limitation for most cash gifts to public charities for 2020. That means you can offset up to 100% of your income this year with charitable contributions. Contributions in excess of this amount can be carried forward for five years subject to the 60% of AGI limit in those years. It’s important to note that both of these provisions under the CARES Act only apply to cash contributions and are not available for contributions made to donor advised funds or gifts to 509(a)(3) supporting organizations.

Don’t forget about other legislation passed in recent years. Among other provisions, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law in December 2019, repealed the maximum age for traditional IRA contributions and increased the age to begin taking RMDs from 70 ½ to 72. However, it also eliminated the “stretch IRA” for non-spouse beneficiaries. With certain exceptions, beneficiaries are now required to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder, which can have important estate planning implications. Finally, the Tax Cuts and Jobs Act of 2017 ushered in numerous changes, including a shift in tax brackets that resulted in lower tax rates for many individual taxpayers. While most of the provisions under the TCJA remain in effect through 2025, it’s important to note that the income floor for unreimbursed medical expenses for those who itemize is scheduled to return to 10% in 2021, unless Congress acts to extend it.* The TCJA reduced the floor to 7.5% for 2017 and 2018, and it was later extended to 2019 and 2020. If you’re close to exceeding this floor, now is the time to think about accelerating expenses for applicable elective procedures and equipment into 2020.

To learn more about tax laws impacting your planning, meet with your tax professional or contact the office anytime to talk about tax-smart financial planning and investment strategies.  

*Information is accurate as of publication date.

Your 2020 Year-End Planning Checklist

There’s no question that 2020 has been an exceptional year. The global pandemic, economic crisis and a contentious U.S. election have combined to make this year one for the history books. With the end of the year in sight, now is the time to take steps to shore up your finances to enter the new year on a firm footing. Use the list below as you work closely with your tax and financial professionals to help identify the best strategies for your situation.

Investment planning

  • Recognize capital gains and losses
  • Review strategies to avoid violating wash sale rules
  • Rebalance your portfolio, as needed, to maintain target allocation

Retirement planning

  • Fund retirement accounts
  • Contribute to health savings account(s), if applicable
  • Consider if a Roth conversion is right for you
  • Review retirement account beneficiary designations
  • Take RMDs (not required in 2020 under the CARES Act)

Tax planning

  • Review income tax withholding
  • Reduce AMT liability, if applicable
  • Accelerate deductions into 2020, as applicable, if itemizing
  • Evaluate state and estate income tax liabilities

Wealth transfer and legacy planning

  • Fund charitable giving
  • Make annual gifts
  • Consider a qualified charitable distribution from an IRA
  • Fund 529 plans
  • Review advanced estate planning strategies
  • Review/update estate planning documents

Financial planning

  • Schedule an annual plan review (at least once every 12 months)
  • Review and update goals
  • Review all beneficiary designations (retirement accounts, 529 plans, life insurance, etc.)
  • Create 2021 spending plan and budget
  • Ensure adequate emergency savings
  • Check your credit report (at least once every 12 months)

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Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state's 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan.

This communication 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.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.