2020 Year End Tax Planning Strategies | Maximize Retirement Savings

2020 Year-End Tax Strategies | Innovative Ideas that Can Add Up to Big Savings

Published on by Mark Hamad in Estate Planning, Tax Services, Video

Learn more about year-end tax planning and other financial strategies from our Ask the Experts series on YouTube.

2020 has brought much uncertainty to our daily lives, but there’s no need to let that uncertainty carry over into 2021 – at least not from a tax perspective. Some smart planning in these final months of the year could significantly reduce your 2020 tax bill. Here are our top ideas.

Consider a Roth IRA Conversion

If you experienced a reduction in income in 2020, now may be the most opportune time to consider a Roth Conversion. You will be taxed in the year of conversion, but in a low-income year, you can take advantage of lower tax brackets. Additionally, the funds converted will grow tax-free, which is an effective way to hedge again rising taxes down the road.

Maximize Retirement Savings

If you’re looking to reduce taxable income before the end of the year, look no further than your retirement accounts. If you have a Traditional 401(k) at work, a thoughtful strategy to reduce taxable income would be to increase contributions as much as possible. Taxable income is reduced dollar for dollar on contribution amounts.

Set up a Health Savings Account (HSA)

Health Savings Accounts (HSAs) are similar to retirement accounts. If you have a High Deductible Plan at work and you’re eligible for an HSA, consider taking advantage before year-end. HSAs provide triple tax advantages, whereas the contributions go into the account as a tax-deductible contribution, funds grow tax-free, and the distribution comes out tax-free too (so long as the distribution is used for qualified medical expenses).

Strategize Charitable Contributions

If you’re charitably inclined, charitable contributions are a great way to not only reduce taxable income, but to also help your local community in a year when many not-for-profit organizations have been stretched thin. And, there are many advantageous tax strategies for charitable giving:

  • CARES Act First, note that the CARES Act includes a provision that allows non-itemized taxpayers to deduct $300 for charitable contributions (i.e., if you take the Standard Deduction, you still have the opportunity to receive an above-the-line $300 charitable write-off).
  • Charitable Bunching Charitable Bunching is a strategy in which you “bunch” two years of charitable contributions into one year. This allows you to Itemize in Year 1 and then take advantage of the higher Standard Deduction limits in Year 2.
  • Donor Advised Funds (DAFs) Consider donating to a Donor Advised Fund. DAFs allow taxpayers to set aside funds into an account and receive an immediate tax deduction, even though those funds may simply be sitting in another account and not given to charity just yet.
  • Qualified Charitable Distributions (QCDs) If you have a required minimum distribution for the year, consider a QCD, which is a direct transfer of funds from your IRA, payable to a qualified charity. Rather than including your IRA distribution into income, a QCD excludes the amount donated from taxable income.
  • Donate Appreciated Stock – Donating appreciated stock can reduce your tax liability and eliminate capital gains on that stock. Additionally, you’ll receive a charitable deduction for the contributed stock’s fair market value.

More Tax-Saving Ideas

2021 Estimated Tax Payments

If 2020 is a low-income year, simply plan to pay in “safe harbor” for 2021 estimates and true up any tax due in April 2022. Safe Harbor avoids any underpayment penalties.

Unrealized Gains and Losses

If you have unrealized gains and losses in your portfolio, consider realizing some gains in a low-income year. Or, if you have large realized capital gains this year, consider tax-loss harvesting to offset losses with those gains.

Required Minimum Distributions (RMDs)

The CARES Act allows taxpayers forego taking RMDs in 2020. However, similar to Roth conversions, in a low-income year it may make sense to take RMDs to benefit from lower tax rates.

Estate Planning

Be sure to include estate planning in your year-end checklist. Make your annual gifts: you can gift up to $15,000 ($30,000 if married filing jointly) to any person in 2020. Plus, you may take advantage of the temporary increases to the lifetime exclusion amount – and those using their exemption won’t be adversely affected when the exemption is reduced in the future (a.k.a. no “claw back”).

2020 Year-End Tax Guide & Additional Resources

Download our 2020 Year-End Tax Planning Guide.

Have questions about your tax situation? Talk to one of our Barnes Dennig tax professionals to ensure you’re ready for any situation.


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