Top year-end tax planning strategies
Tax planning toward the end of the year is important to your overall financial strategy. The steps you take now to mitigate your tax burden can help you reduce your taxable income and save money later. Start with the following tips, and then ask our firm for assistance to create a personalized plan:
Decide whether you should take the standard deduction
Given that the standard deduction was almost doubled in 2018, and has been increased again for 2020 to $12.400, for most taxpayers it doesn't make sense to itemize deductions unless you have a lot of high-dollar value deductions such as large medical expenses or charitable gifts.
If you take the standard deduction on your 2020 tax return (the one that you'll file in 2021). you can claim a brand new "above-the-line" deduction of up to $300 for cash donations to charity you make this year. Donations to donor advised funds and certain organizations that support charities are not deductible.
Top up your retirement savings
If you haven't already contributed to your retirement savings, now's the time to do it. Not only will you be contributing to a stable retirement. you'll also be sheltering your income from taxes. For 2020, you can contribute up to $19,000 to a 401(k). The contribution limit for employees who participate in 401(k). 403(b), most 457 plans and the federal government's Thrift Savings Plan has been increased from $19,000 to $19,500.
The catch-up contribution limit for employees aged 50 and over who participate in these plans was increased from $6,000 to $6,500.
Defer tax when you can
Deferral remains a cornerstone of smart tax planning. Deferring tax is about accelerating deductions and postponing income. If you're self-employed, consider asking your clients to defer payments or invoice them later. If you're employed and receive bonuses, ask your employer if they can be deferred.
In terms of deductions. you may be able to accelerate state and local income taxes. interest payments. and real estate taxes. Be sure to check on the specific tax rules for your particular situation before accelerating these deductions. "Above-the-line deductions" such as traditional individual retirement account and health savings account contributions, self-employment taxes, and certain health insurance costs are also things to consider.
Double-check your tax withholding
Ideally, your withholding and/or estimated taxes align with what you actually expect to pay in taxes. If they don't. look into your tax situation before the end of the year so you have time to fix the problem before tax season. If you're in danger of being penalized for underpaying taxes. you can make up the shortfall through increased withholding on your income or bonuses.
If you're self-employed, be aware that even making a larger estimated tax payment at the end of the year can still mean penalties for underpayments in previous quarters. However. withholding is considered to have been paid ratably throughout the year. so increasing it for year-end wages can save you on penalties.
Make the most of the gift tax exclusion
You can give up to $15.000 to as many people as you wish in 2020, free of the gift or estate tax. If you combine gifts with a spouse, the exemptions can be used together to give up to $30,000 per beneficiary each year. For example. you could give each child and/or grandchild that amount of money, thus reducing your tax burden significantly.
Now is the time to start employing these strategies to lower your tax burden before the end of the year. if they apply to your situation. If you need individualized help reviewing your tax situation. please contact our firm. ■Back to issue