Year End Tax Planning Tips For Individuals

2020 presents challenges and opportunities for year end tax planning

The impact of COVID-19 is being felt across the financial spectrum, from reduced incomes, to unpredictable market swings, to lower interest rates and slashed dividends. During such a volatile time, it is important to keep in mind these year end tax planning tips for individuals.


Give to charity

Charitable giving is a tried and true year end tax planning strategy that may prove particularly valuable this year. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily raises the ceiling on charitable deductions for cash contributions to public charities. For 2020, you can deduct as much as 100% of your adjusted gross income (AGI), which is up from the usual 60%.  The increase provides the opportunity, with some savvy planning, to slash or completely offset taxable income for the year. Note that certain contributions, such as those to donor-advised funds and private foundations, don’t qualify for the 100% limit.


No need to limit gifts to cash donations in order to fully benefit. You can “stack” cash donations with gifts of property subject to unchanged limits. For example, gifts of appreciated marketable securities are subject to limits of 20% or 30% of AGI, depending on various factors. So you could donate appreciated marketable securities held for more than a year (long-term capital gains property) to public charities in the amount of 30% of your AGI (thereby avoiding any capital gains taxes), and also donate 70% of your AGI in cash to public charities.


Or you could donate long-term capital property to a private foundation in the amount of 20% of your AGI and donate 80% of your AGI in cash to public charities. Under either scenario, you are offsetting your entire taxable income.

But you will also want to keep in mind your prospects. If you accelerate donations you otherwise would have made in the future but due to COVID-19 or other reasons, your income this year is taxed at lower brackets than in coming years, you may forfeit tax savings. We can help you determine the best charitable giving strategy for your situation.


Execute a Roth conversion

Now is a good time to consider converting pretax traditional IRAs to after-tax Roth IRAs. The usual advantages of Roth IRAs — that you can extend tax-free growth since Roth IRAs do not have required minimum distributions (RMDs), and that distributions generally will be tax-free — may be augmented by other advantages triggered by current circumstances.


When you convert a traditional IRA, you must pay income tax on the fair market value of its assets on the date of transfer. If your IRA holds stocks that have decreased in value due to fluctuating markets or if you are in a lower tax bracket for 2020, you will pay less in taxes now. Subsequent recoveries in value will be tax-free as well.


There are no AGI limits on Roth IRA conversions, but note that the maximum amount you can contribute annually to a Roth IRA is subject to phaseouts based on AGI. Depending on your income, you may not be able to make annual contributions to the Roth IRA.


Harvest your losses

Market swings could provide the opportunity to harvest losses that you can then use to offset any taxable gains. By selling underperforming investments before year end, you neutralize realized gains on a dollar-for-dollar basis. And if you realize more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income, with any remaining losses carried forward to future tax years.


Compound the benefit by donating the proceeds from the sale of a depreciated investment to charity. You apply the loss to offset gains and if you itemize, claim the charitable contribution deduction for the cash donation. If you do not itemize, you can still deduct up to $300 of contributions above the line this year due to a temporary provision in the CARES Act.


Act now

Timing is key in taking advantage of these opportunities. But keep in mind whether your tax bracket is likely to change in the future, whether due to income shifts or tax law changes under a new administration. Also keep an eye out for any additional legislation that might be signed into law providing more tax breaks for 2020. We are here to help you plot the best course to minimize your tax liabilities this year and beyond.


What about gift and estate taxes?


If your net worth is large enough that gift and estate taxes are a concern, this may be a good time to take steps to reduce them. The higher exemptions under the Tax Cuts and Jobs Act are scheduled to sunset in 2026, and Congress could reduce them sooner.


The transfer of appreciable assets that have dropped in value but are likely to rebound eventually could produce some substantial tax savings before then. Transfers to vehicles such as grantor-retained annuity trusts and charitable lead annuity trusts can help you lock in the benefits of the current higher exemptions.


And low interest rates make intrafamily loans attractive. The value of the note on a loan is frozen in the lender’s estate, while the loan proceeds grow outside of the estate — all without using any of the lifetime gift tax exemption, provided the loan is structured and executed properly.


Our gift and estate tax team is ready to help!

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