2020 end of year tax planning opportunities

With only a month left in 2020, now is a good time to take advantage of some strategic tax planning before the end of the year. This list isn’t exhaustive, but it at least covers the most common opportunities to look for:

• Charitable donations – If you’re charitably inclined, December is a good time to get in your donations for the year, if you haven’t already. Even if you normally use the standard deduction and therefore aren’t able to deduct your donations, 2020 is a bit different. Thanks to the CARES Act, if you will use the standard deduction on your 2020 tax return, you can still get a deduction for up to $300 of charitable donations for the year. However, those donations need to be in the form of cash, check or credit card…they can’t be property or securities.
• Tax loss & gain harvesting – If you invest in stocks, bonds and funds in a regular brokerage account, you may have sold some positions this year at potentially sizable gains or losses. If you so far have a large net gain for the year, perhaps see if you have other positions that could be sold at a loss to help offset those gains (i.e. tax loss harvesting). Or, if you have really low taxable income for the year, you may be able to sell for a gain some positions you’ve held more than a year and pay no tax on them (i.e. tax gain harvesting).
• Roth conversions – While not right for everyone, especially those who are already in high tax brackets, Roth conversions can help reduce your long-term tax bill. By “converting” money from your tax-deferred accounts to Roth accounts, you pay tax on the conversion now, but the converted monies will then grow and eventually be withdrawn tax-free. Since the year is almost over, you should have a good idea of what your total income will be for 2020. Therefore, you can figure out how conversions would incrementally add to your income and taxes. And speaking of owing taxes…
• Tax withholding & estimated payment check-up – Now is a wise time to take stock of all your income for the year and all of the taxes you have thus far paid through withholdings or estimated payments. If you have so far underpaid your expected taxes for the year, you can potentially withhold some extra tax from sources like IRA distributions or your last couple of paychecks. Or, you can make a 4th quarter estimated tax payment.

Charitable donations, brokerage account sales and Roth conversions all need to occur by the end of December 31st to apply to the 2020 tax year. Similarly, additional tax withholdings would need to happen by the end of the year to count for 2020. However, 4th quarter estimated tax payments are not due until January 15th 2021 – if paid by then, the payments will apply toward 2020.

The above summaries only scratch the surface of each item. If you are unsure if any of these opportunities make sense for you, discuss them with your tax or financial professional before making any decisions.