Taxes are the biggest expense for many Americans, and yet, most fail to do much to reduce their income taxes. Those that use a professional tax preparer may get some good suggestions when they get their tax return done early in the year, but to get the best tax savings, you need to so some extensive planning during the tax year. And we’re nearing the end of 2020, a year that saw some substantial tax law changes.
#10: Capital Losses: Each year you can deduct up to $3,000 in investment losses against your income and can use additional losses to offset capital gains. While the major stock indices are up a bit this year driven by the FANG stocks, most stocks are lower today. Depending on when you bought, you may have some positions at a loss that could be sold to capture the capital loss.
#9: Charitable Donations: The pandemic lockdowns have hit some people harder than others. In addition to the social service organizations, other nonprofits, including theaters, arts organizations, museums and others are in dire need of help today. Even if you don’t itemize your tax deductions anymore, you can still donate up to $300 and get a deduction. Also, the limit on deducting donations of more than 50% (60% if donations are cash only) of your adjusted gross income has been suspended for 2020.
#8: QCD: The qualified charitable distribution allows taxpayers over age 70 ½ to donate up to $100,000 in funds from their IRAs each year directly to charity with no income taxes due. This often provides additional benefits beyond the value of the tax deduction. By avoiding taking the income, other taxes like state income taxes or benefits based on your adjusted gross income can be positively impacted.
#7: Loss of Income: Due to the lockdowns this year, many workers have lost their jobs or seen their income decline significantly. While that can also mean a drop in taxes, going from a 28% or higher federal bracket to 0% may not be the best way to save. You may have the opportunity to take some gains or other income in 2020 and reduce your multi-year tax bill by taxing the income now at a lower rate rather than a higher rate in future years.
#6: RMDs: For retirees, the pandemic-induced tax law changes have suspended the requirement to take a minimum distribution from IRAs and other retirement accounts this year. If you don’t need to take the income from those accounts, you’ve got an opportunity to reduce your taxable income and taxes. But see #7, as this may open you up to other tax saving strategies.
#5: Partial Roth Conversions: A Roth conversion is when you take funds from your Traditional IRA or other qualified retirement account and transfer it to a Roth. The benefit is that the growth and withdrawals from the Roth will not be taxed in the future. The downside is that the withdrawal from the Traditional account does count as income in the year of the conversion. If your income tax rate is lower this year, it may make sense to move some funds to the Roth. You can determine how high you want to go in the tax brackets and limit the amount you want to convert.
#4: Mutual Fund Capital Gain Distributions: By the middle of November, most mutual funds will begin to estimate the amount of capital gains that they will pay out by December 31. Even if a fund hasn’t done well this year, it still may pay a distribution based on stocks they sold during the year. It’s helpful to know what gains you may have and factor those into your year-end tax planning.
#3: ‘Tis the Season: The end of the tax year is the best time to do tax planning. The tax laws are sorted, and you should have a pretty good idea of your various income sources and potential deductions. Making moves before the end of the year is the only way to capture most opportunities.
#2: Avoid Penalties: The withholding of income taxes from your paycheck, Social Security or pension payments is just an estimate of your tax liability for the year. Many people also pay estimated payments to cover taxes on dividends, interest and capital gains. It’s a good idea to review your tax payments and potential tax bill toward the end of the year to avoid underpaying your taxes and getting hit with a penalty come April. The Federal tax penalties aren’t severe, but Michigan charges a significant penalty for underpayments.
#1: The Election: You may have noticed that there is a big election coming up in a couple weeks. While the presidential race alone may not impact tax laws significantly (despite what either candidate claims), the outcome of the Senate races will. If the Democrats win both the White House and take control of the Senate, there will likely be substantial tax law changes. Even without a sweep, the trillions of dollars in fiscal stimulus spent this year and possibly into next year will likely lead to higher taxes at some point. We may look back fondly at 2020 as the last year of low tax rates, and there’s only a couple months left to see how you can benefit.
At Vintage, we’re not like most wealth management firms. We don’t throw out some limited tax suggestions and then tell you to check with your tax professional. We are tax professionals with CPAs and Enrolled Agents on staff, and we prepare hundreds of our clients’ tax returns every year. We proactively look for opportunities to save them money and handle everything for them. Find out why Barron’s/Wall Street Journal, Forbes, Financial Times and Investment News have named us among the top firms in the country. But get started today because this year will be over soon!