4 Things You Can Do By the End of the Year to Help Lower Your 2020 Tax Bill
Here come the holidays and everything that goes with them – traveling, cooking, buying gifts, and of course, spending time with the people we love. It’s a busy time of year when finances can take a back seat, but don’t wait to review your tax situation. Here are four things you can do by the end of the year that could help lower your 2020 tax bill.
Review Your Retirement Account Contributions And Distributions
Starting at age 50, workers can make increased “catch-up” retirement plan contributions. In 2020 you can contribute up to $7,000 to an IRA if you are age 50 or older, or up to $26,000 to a 401(k), 403(b), or most 457 plans. The CARES Act suspended Required Minimum Distributions for 2020, but you may still choose to withdraw from your 401(k), IRA, or other retirement accounts by December 31st to have it count for the 2020 tax year. Or, you may be considering a Roth IRA conversion by December 31st. In this case, you would pay tax on the funds converted and then be able to withdraw them tax-free later. There are reasons why your tax burden could increase in retirement, and a Roth conversion is one way to plan ahead. Note that Roth IRA conversions are irreversible and that money can’t be withdrawn penalty-free until five years after it’s converted, and typically until age 59 ½.
Make Your Charitable Donations
Tis the season of giving, and if you itemize your taxes you may be able to deduct qualified charitable contributions. Normally, there is a cap on how much someone can donate to charity tax-free, which is 60% of a taxpayer’s AGI. The CARES Act raised this limit to 100% of AGI for the 2020 tax year. It also allows taxpayers who don’t itemize to deduct up to $300 in charitable donations in 2020.
Review your Investments
If you’ve had investment losses this year, you can deduct part of them to offset your gains. If you have more capital losses than you have gains for a given year, then you can claim up to $3,000 of those losses and deduct them. If you have more capital losses than that, then you’re allowed to carry the excess forward for use in future years. There’s no time limit for using the capital loss deductions that you’ve carried forward.
Look Ahead to 2021
We would love to be part of your financial team this time of year and throughout the rest of the year – through thick and thin and through all the changes you’ll go through as you enjoy retirement. These three things are just a few of the end of year tax planning moves you could potentially make. We can help you create a tax minimization strategy for retirement, as well as for your estate plan. Come talk to us about your tax minimization strategy for 2020 and beyond.
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