Breaking the Code: 2020 Year-End Tax Planning Considerations
By: Rachel Speigle Dunnigan, CPA, MSA, CFP®
While there is still uncertainty regarding the future of tax reform or expected changes in 2021, we wanted to highlight a handful of options for our clients to read through, evaluate, and consider implementing prior to the end of the year.
Charitable Contributions
This is a great topic to highlight on Giving Tuesday with a few differences this year. Qualifying cash donations are typically limited to 60% of a taxpayer’s adjusted gross income (AGI). This limitation has been suspended for 2020 so that individuals can deduct up to 100% of their AGI for qualifying cash donations.
The CARES Act allows an additional $300 charitable deduction on qualifying cash donations even for individuals who take the standard deduction. One note that is consistent with previous years: all donations must be made by December 31, 2020 in order to be eligible for taxpayers’ 2020 tax returns. As a heads up, Massachusetts is currently reviewing their state charitable tax deduction. If restored, this will create a tax incentive for giving without requiring taxpayers to itemize deductions - potentially beginning as early as 2021.
Required Minimum Distributions (RMDs)
The CARES Act waived all RMDs for 2020, as well as updated the RMD age tables. The Required Beginning Date is now April 1 following the year the taxpayer turns 72 (for employer retirement plans like 401(k)s, this can be delayed until retirement if still working).
Roth IRA Conversion
Since RMDs are suspended for this year, taxpayers could consider converting the equivalent amount to a Roth IRA. Any future growth of Roth IRAs is tax-free as long as distributions qualify. This could be an especially attractive option if you expect tax rates to increase in the future.
Tax Loss Harvesting
While there are rules to keep an eye out for, such as wash-sale, now is a great time to evaluate investments at a loss with financial advisors. If able to utilize, this strategy is helpful in order to offset other capital gains realized. As a reminder, taxpayers are limited to a $3,000 capital loss deduction when offsetting ordinary income.
Annual Gift Exclusion
Taxpayers may give up to $15,000 each to as many individuals as they would like with no tax implications or any reduction of the lifetime gift and estate tax exemption. For gift tax purposes, the date of the completed gift is the date the check is cashed/funds are transferred - the check must be cashed on or before 12/31/20 to count for this tax year.
We have also included some important tax numbers expected for 2021 below, assuming no changes. As always, we will continue to keep you informed of any expected tax updates as they occur. Please don’t hesitate to reach out if you have any questions about your specific situation.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.