Year-End 2020 Tax Tips
Here are some things to consider as you weigh potential tax
moves before the end of the year.
Defer income to next year
Consider opportunities to defer income to 2021, particularly
if you think you may be in a lower tax bracket then. For example, you may be
able to defer a year-end bonus or delay the collection of business debts,
rents, and payments for services in order to postpone payment
of tax on the income until next year.
Accelerate deductions
Look for opportunities to accelerate
deductions into the current tax year. If you itemize deductions, making
payments for deductible expenses such as medical expenses, qualifying interest,
and state taxes before the end of the year (instead of paying them in early
2021) could make a difference on your 2020 return.
Make deductible charitable contributions
If you itemize deductions on your federal income tax return,
you can generally deduct charitable contributions, but the deduction is limited
to 60%, 30%, or 20% of your adjusted gross income (AGI), depending on the type
of property that you give and the type of organization to which you contribute.
(Excess amounts can be carried over for up to five years.) For 2020 charitable
gifts, the normal rules have been enhanced: The limit is increased to 100% of
AGI for direct cash gifts to public charities. And even if you don't itemize
deductions, you can receive a $300 charitable deduction for direct cash gifts
to public charities (in addition to the standard deduction).
Bump up withholding
If it looks as though you're going to owe federal income tax
for the year, consider increasing your withholding on Form W-4 for the
remainder of the year to cover the shortfall. The biggest advantage in doing so
is that withholding is considered as having been paid evenly throughout the
year instead of when the dollars are actually taken from your paycheck.
More to
ConsiderHere are some other things you may want
to consider as part of your year-end tax review.
Maximize retirement savings
Deductible contributions to a traditional IRA and pre-tax
contributions to an employer-sponsored retirement plan such as a 401(k) can
reduce your 2020 taxable income. If you haven't already contributed up to the
maximum amount allowed, consider doing so. For 2020, you can contribute up to
$19,500 to a 401(k) plan ($26,000 if you're age 50 or older) and up to $6,000
to traditional and Roth* IRAs combined ($7,000 if you're age 50 or older). The
window to make 2020 contributions to an employer plan generally closes at the
end of the year, while you have until April 15, 2021, to make 2020 IRA
contributions.
(*Roth contributions are not deductible, but Roth qualified
distributions are not taxable.)
Avoid RMDs in 2020
Normally, once you reach age 70½ (age 72 if you reach age
70½ after 2019), you generally must start taking required minimum distributions
(RMDs) from traditional IRAs and employer-sponsored retirement plans.
Distributions are also generally required to beneficiaries after the death of
the IRA owner or plan participant. However, recent legislation has waived RMDs
from IRAs and most employer retirement plans for 2020 and you don't have to
take such distributions. If you have already taken a distribution for 2020 that
is not required, you may be able to roll it over to an eligible retirement
plan.
Weigh year-end investment moves
Though you shouldn't let tax considerations drive your investment
decisions, it's worth considering the tax implications of any year-end
investment moves. For example, if you have realized net capital
gains from selling securities at a profit, you might avoid being taxed on some
or all of those gains by selling losing positions. Any losses above
the amount of your gains can be used to offset up to $3,000 of ordinary income
($1,500 if your filing status is married filing separately) or carried forward
to reduce your taxes in future years.
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