Year-end Tax Planning Tips
By: Team Hewins
Tags: Year End Planning, Taxes, Financial Planning

2020 has certainly been an eventful year, so it’s likely that income taxes have not been at the top of your mind. But there is still time before year-end to complete some simple strategies that have the potential to save you big bucks on your 2020 tax bill.

Required Minimum Distributions (RMDs)

If you haven’t taken your RMD yet and don’t need the cash, don’t take it! The CARES Act suspended RMDs for 2020 — you are not required to take any distribution this year. RMDs are fully taxable at ordinary income rates, so any reduction or elimination of the amount you take out will help your tax situation. This suspension is only a one-year reprieve. If you can get by without the cash for now, wait until sometime next year so that it will count towards your 2021 RMD.

Charitable Contributions

This is one of the easiest ways to lower your tax bill, and you get the added benefit of helping out others in need. Generally, these contributions will only help lower your taxes if you itemize rather than take the standard deduction ($12,400 Single, $24,800 Married Filing Joint). In 2020, however, the CARES Act included a provision that allows for up to $300 in cash donations to be deducted from income for taxpayers claiming a standard deduction. You can make a gift to any 501(c)(3) organization; if you’re not sure the organization qualifies, simply ask them. If you don’t know what charities to gift to right now, no problem — you can also make the gift to a Donor-Advised Fund (DAF). A contribution to a DAF allows a deduction in the year you make the gift and also provides flexibility in that there are no requirements as to when you have to disburse the funds to charity. See the article in this link for more detailed information on donor-advised funds.

A great strategy to fund a gift is by using appreciated securities (e.g., stocks, mutual funds, or ETFs). You’ll first need to check with the organization you’re donating to in order to make sure they can receive securities, but more and more are accepting this method since it’s so attractive to donors. By doing it this way, you are basically getting more bang for your buck since you don’t have to sell the stock in order to make the gift. For example, let’s say you want to make a $1,000 donation to a charity, and you plan to use $1,000 worth of stock you bought five years ago for $100. If you sell the stock and give them the $1,000 in cash, you will still have to pay taxes on the $900 gain. If you instead gift the stock to the charity, you don’t have to pay any tax at the time of the transfer, and the charity doesn’t either since it’s a tax-exempt entity.

If you are in a situation where you are right on the edge of taking the standard deduction and itemizing, you should consider bunching your contributions — making the majority of your gifts every other year in order to maximize your deductions over time. For example, let’s look at a married couple whose only itemized deduction is $15,000 in annual charitable contributions. If they continue to donate $15,000 a year, then they will always end up taking the standard deduction. If instead they donate $30,000 in one year, they would be able to itemize in that year and take the $24,800 standard deduction the next year.

Retirement Savings Accounts

If your cash flow situation allows for it, max out your traditional 401(k) contribution for the year. If you’re under 50 you can contribute up to $19,500; if over 50 you can add an additional $6,500. A contribution to a traditional 401(k) account will reduce your taxable income dollar for dollar. If you have some other type of retirement plan or IRA, talk to your CPA to see how much you are eligible to contribute.

Tax-loss Harvesting

Although tax-loss harvesting is a year-round strategy, this is a good time to check if there are additional losses you can take in 2020 in your non-retirement accounts. The losses can be used against any capital gains incurred throughout 2020 or can be carried forward indefinitely if there are no gains to offset. Even if you don’t have capital gains in future years, you can deduct $3,000 per year against ordinary income. You don’t want to miss out on market activity though, so if you sell to realize a loss, make sure to buy a similar holding (but not the same to avoid the wash sales rules). Once you’ve held the new investment for 30 days, you can sell and buy back the original one.

Remember that everyone’s situation is unique, so no matter what tax savings strategy you are considering, please consult with your financial advisor or CPA to ensure that it is appropriate for you and fits well with your long-term goals and financial plan.

If you have any questions or wish to discuss further, please reach out to your Team Hewins advisor.

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. The information contained within this letter is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any types of securities. Past performance is not a guarantee of future returns. It should not be assumed that diversification protects a portfolio from loss or that the diversification in a portfolio will produce profitable results. The opinions stated herein are as of the date of this letter and are subject to change. The information contained within this letter is compiled from sources Team Hewins believes to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.