Investment and Income Tax Strategies for Individuals

2020 Year-end Tax Planning Strategies for Individuals

Now is an ideal time to consider year-end strategies that may benefit you, and plan for 2021.

Results of the election on November 3, 2020 may require a need to revisit this checklist. For example, if you anticipate your marginal income tax rates to increase next year, whether due to increased income or changes to tax legislation, you may want to look to ways to accelerate income and defer deductions.

Offset capital gains

Harvest your losses by selling taxableinvestments.

Harvest your gains by selling taxable investment if you have capital loss carryovers or year-to-date losses for the current year. Short-term losses are most effective at offsetting capital gains. Note: wait at least 31 days before buying back a holding sold for a loss to avoid the IRS wash sale rule.

Evaluate if you should delay purchasing mutual fund shares until 2021 to avoid capital gains on brand new investments.

Defer or reduce income (if you anticipate being in a lower taxable income bracket in 2021 or later)

If possible, defer income and the sale of capital gain property until 2021 or later to postpone taxable income to the following year.

Consider using an RBC Credit Access Line to cover any short-term income distribution gaps.

Bunch your itemized medical expenses in the same year in order to meet the threshold percentage of your adjusted gross income to claim such deductions.

In December, make your January mortgage payment (i.e., the payment due no later than January 15) so you can deduct the interest on your 2020 tax return.

Increase your W-2 federal withholding amount in preparation for a significant tax bill or to avoid the under- withholding tax penalty.

If you have concerns that you may be subject to the Alternative Minimum Tax (AMT), speak with your tax advisor before deferring income or accelerating deductions, as your AMT status could limit your ability to benefit from these actions.

If you feel you will be in a lower income tax bracket in the future and can accept the risk of receiving payments over time, use installment sale agreements to spread out any potential capital gains among future taxable periods.

For 2020 only, consider not taking your RMD if you are in a higher income tax bracket in 2020 than you expect to be in 2021 or future years.

Retirement planning

Maximize your IRA contributions. You may be able to deduct annual contributions of up to $6,000 to your traditional IRA and $6,000 to your spouse’s IRA. If you are 50 or older, take advantage of catching up on IRA contributions and certain qualified retirement plans. You may be able to contribute and deduct an additional $1,000.

Take your Required Minimum Distribution (RMD) if you are age 72 or older.

Consider increasing or maximizing your 401(k) and retirement account contributions.

Consider contributions to a Roth 401(k) plan (if your employer allows and you are in a lower income tax bracket now than you expect to be in the future).

Avoid mandatory tax withholding by making a direct rollover distribution to an eligible retirement plan, including an IRA.

Avoid taking IRA distributions prior to age 59½ or a 10% early withdrawal penalty may apply.

Consider setting up a Roth IRA for each of your childrenwho have earned income.

Consider converting from a traditional IRA to a Roth IRA if in a low marginal income tax bracket. Partial Roth IRA conversions are permissible.

Investment and income tax strategies

Explore taking employer stock from tax-deferred accounts (net unrealized appreciation strategy) to take advantage of capital gains tax rules.

Determine the optimal time to begin taking Social Security benefits, which you can apply for between ages 62 and 70.

If you have been impacted by the COVID-19 pandemic as defined by the IRS, you may be eligible to take a COVID-19- related distribution from an eligible retirement plan. The deadline for taking such a distribution is December 30, 2020, and you may withdraw up to an aggregate limit of $100,000 from all eligible plans and IRAs. You have to pay income tax on the COVID-19-related distribution, but the 10% penalty for withdrawals before age 59 ½ does not apply and the taxes can be paid over three income tax years.

If you have business losses that flow through to your individual tax return in 2020, consider a Roth conversion or harvest capital gains to create income that is offset by the business loss.

Make a Roth IRA contribution if under the applicable earnings limitation  for tax  year  2020. If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139, 000. If your married filing jointly your MAGI must be under $206,000.

Gifting strategies

Give to loved ones

Consider making gifts of up to $15,000 per person allowed under federal annual gift tax exclusion. Use assets likely to appreciate significantly for optimum income tax savings.

Make sure that your estate plan is up to date, and that you have a will, revocable trust, health care directive and power of attorney in place.

Give to those in need—charity

Make a charitable donation (cash or even old clothes) before the end of the year. Remember to  keep  all  of your receipts from the recipient charity. If the charitable contribution is made very close to year end, consider using a credit card to record that they can be deducted in the current year.

Use appreciated stock rather than cash when contributing to charities. This may help you avoid income tax on the built-in gain in the stock, while at the same time maximizing your charitable deduction.

If you are over 70½ in 2020 and would like to make a donation to charity from your IRA, you can donate up to $100,000 each year directly to qualified charities using a Qualified Charitable Distribution. You avoid taxes through a direct transfer of funds from your IRA custodian to qualified charities. It is a particularly effective way to direct your required minimum distribution.

Set up a donor-advised fund for an immediate income tax deduction and provide immediate and future benefits to charity over time.

Consider “bunching” several years of charitable contributions into one year with a gift to a donor-advised fund to make your contributions more tax-efficient.

Itemize personal residence and mortgage interest*

Up to $250,000 ($500,000 for married couples filing jointly) of the gain from the sale of your principal residence can be excluded from federal income tax, if you lived in the house for 2 of the last 5 years and other requirements are met.

Interest on up to $750,000 of mortgage indebtedness incurred after December 14, 2017, is allowed as an itemized deduction if used to purchase or improve a home.

For mortgages incurred December 14, 2017, or earlier, interest will be deductible on up to $1,000,000 of debt (the old cap), even if refinanced after December 14, 2017.

Set yourself up for success when doing your 2020 taxes

Send capital gains and investment income information to your accountant for a more accurate year-end projection.

Check your Health Savings Account contributions for 2020.If you qualify, you can contribute up to $3,550 (individually) or $7,100 (family), and an additional $1,000 catch-up if you are age 55 or older. Confirm you’ve spent the entire balance in your Flexible Spending Accounts for the year.

Revisit contribution amounts to your 529 plan college savings accounts.

Review Medicare Part D plan to potentially make a change during open enrollment, which begins in October.

Planning for 2021

Discuss major life events with your tax attorney to ensure you have clarity in your current situation and direction for tomorrow. Thisincludes family, job or employment changes and significant elective expenses (real estate purchases, college tuition payments, etc.).

Ensure your account preferences and risk tolerance and investment objectives are up to date with your financialadvisor.

Double check your beneficiary designations (employer- sponsored retirement plans, 401(k)s, IRAs, Roth IRAs, annuities, life insurance policies, deferred compensation plans, etc.), transfer on death (TOD) designations and payable on death (POD) designations. They should be updated as necessary and align with your estate plan.

Review to ensure you have designated a trusted contact person on each of your accounts to help protect your assets against fraud and financial exploitation.

* Interest on mortgage or home equity debt not used to purchase or improve a personal residence is no longer allowable as an itemized deduction.

IRS Waives Required Minimum Distributions (RMD) from Retirement Accounts for 2020

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which became law on May 27, 2020, waives the requirement that taxpayers take required minimum distributions (“RMDs”) for 2020 from IRAs. According to Notice 2020-51 recently issued by the IRS, taxpayers who already took 2020 RMDs may be able to return them to their IRA accounts and avoid paying income tax on the distributions. The timing, however, is critical.

RMDs are minimum annual distributions that the IRS requires taxpayers to begin taking from their qualified retirement accounts after they turn a specified age. Previously that age was 70½, which was changed to age 72 by the SECURE Act enacted on December 20, 2019. Normally, taxpayers must begin taking RMDs by April 1 of the year following the year in which they reach the specified age. The CARES Act waives this requirement for 2020, including 2020 RMDs and 2019 RMDs that were required to be taken by April 1, 2020.

However, the CARES Act created three issues surrounding RMDs:

  1. Under current tax law, IRA owners are generally allowed to withdraw funds from an IRA account for up to 60 days without incurring tax liability. As long as the funds are returned to that account or rolled over to another qualified retirement account within 60 days, the IRA owner pays no tax and no early withdrawal penalty. As indicated above. the CARES Act, which waives required RMDs for 2020, became law at the end of March 2020. By that time, many people had already taken their RMDs for 2020 and were outside the 60-day rollover window. The CARES Act did extend the 60-day rollover window to July 15, 2020 for RMDs taken on February 1st or later. However, it did not apply to RMDs taken in January. Those distributions had no relief under the CARES Act.
  2. Under current tax law, you may only roll over only one IRA distribution in a 12-month period. For taxpayers who already conducted one rollover within the past 12 months, they were prohibited by law from subsequently rolling their RMDs back to the account where it came from or into another qualified retirement account. The CARES Act provided no relief for these taxpayers.
  3. Under current tax law, taxpayers who have inherited IRA accounts other than surviving spouses are prohibited from engaging in any rollovers. For such persons who had not yet taken their 2020 RMDs, the CARES Act eliminated the need to take them. However, for any such person who had already taken his or her 2020 RMD, the CARES Act provided no relief to allow that person to roll those funds back into the IRA account.

IRS Notice 2020-51 states that you now have until August 31, 2020 to rollover all previously distributed 2020 RMDs. This includes RMDs taken in January 2020. It also states that the rollover or repayment of RMDs will not be treated as a rollover for purposes of the one rollover per 12-month period rule. The notice also allows for the rollover of 2020 RMDs withdrawn from any inherited IRA account.

This is good news for those individuals who took RMDs and would like to put them back. By putting them back, you can reduce your current year taxable income and allow the funds to grow tax-deferred for an additional year. However, you need to act by the August 31, 2020 deadline.

If you have any questions about required minimum distributions, call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year-round.

Determining How Much State Income Tax To Be Withheld From Your Retirement Plan Distributions

TaxThe Law Offices of Spadea & Associates assists clients with their taxes from all over the country. From time to time our clients need help determining how much state income tax should be withheld from their pension or retirement account distributions. Listed below are the sixteen states that tax pensions and retirement accounts. Obviously, if you do not reside in one of the states listed below you should not have any state income tax withheld from your pension distribution. However if you do live in one of the 16 states listed below, when you fill in IRS form W-4P, you should have state income tax withheld at the following rates:

State Name Income Tax Withholding Percentage of Gross Distribution
 Arkansas  5%
 California  9%
 District of Columbia  8.95%
 Delaware  5%
 Georgia  6%
 Iowa  5%
 Kansas  4.50%
 Massachusetts  5.10%
 Maine  5%
Michigan  4.25%
North Carolina  4%
Nebraska  5%
Oklahoma  5%
Oregon  8%
Virginia  4%
Vermont  9%

 

You can find a W-4P on my website resource page under IRS Tax Forms. If you have any questions or need help with your taxes call Gregory J. Spadea at 610-521-0604.

© 2021 The Law Offices of Spadea & Associates. All Rights Reserved. Sitemap | Disclaimer | Privacy Policy by VPS Marketing Agency, LLC