As 2020 closes, we can agree that this year was unlike any other; the pandemic, natural disasters, and expected future tax law changes following the election have had a significant impact on many taxpayers. In response to the pandemic, Congress passed two major pieces of legislation – the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act – and more relief may be forthcoming before the end of the year. Here are things to consider before the close of this tax year.
Capital Gains
- Selling underperforming assets at a loss would offset current year capital gains as well as an additional $3,000 capital gains loss against ordinary income on your 2020 tax return, and the remaining losses would carry over to 2021. Harvesting losses now could save taxes if capital gain tax rates are increased in the future.
- An opposite approach for those who have lower incomes for 2020; this may be an opportunity to sell appreciated assets and pay capital gains tax while in a lower tax bracket.
Charitable Contributions
- Another option to avoid capital gain tax is to donate appreciated securities. Securities held over one year that are donated to qualified chartable organizations may be deducted at fair market value as an itemized deduction without incurring the capital gains tax associated with a sale of that asset.
- Consider lumping your 2021 (or multi-year) planned contributions into 2020 to meet the itemized deduction threshold and fully take advantage of the deduction. Speak with your financial advisor about contributions to Donor Advised Funds.
- For those who do not itemize, a $300 above-the-line deduction for cash contributions is available for 2020.
Retirement
- Check your employer provided retirement plans to make sure you are contributing as much as you are able and maxing out the annual contribution limits. The 2020 employee elective deferrals for 401(k) plans are $19,500 and $26,000 for those over 50.
- Self-employed individuals may consider opening a solo 401(k) before the year end.
- Backdoor Roth IRA contributions are a great option for those unable to make a traditional contribution to a Roth IRA or make a deductible contribution into an IRA. This is best utilized by individuals that do not have existing deductible IRAs.
- The CARES act allowed those with adverse financial consequences due to COVID-19 to withdraw up to $100,000 from qualified retirement accounts without incurring the 10% early withdrawal penalty. While the withdrawal is still taxable, you are able to recognize the income ratably over the next 3 years.
- The CARES act allows for a temporary waiver of required minimum distributions for the 2020 calendar year.
HSA Contributions
- Health Savings Accounts (HSA) for those with eligible high deductible medical plans are a great opportunity to shelter income from taxation. For 2020, self-only plans have a limit of $3,550 or up to $7,100 for family coverage.
Gift Taxes
- The 2020 annual gift exclusion allows tax-free transfers up to $15,000 per person. For children and grandchildren, consider gifting to ROTH IRAs if they have earned income or to 529 or other educational savings vehicles.
If you would like to schedule a tax planning session with our team, please reach out as soon as possible.
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Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.