Let’s End 2020! But don’t forget year-end tax planning!

Sep 21, 2020

It is September. Costco is selling Christmas Trees and unlike most years, this doesn’t annoy me. Like many others, I want 2020 to be in the rearview mirror. After all, 2020 is the year of the rat! Before the rat grabs your cheese, be sure to consider these tax-saving strategies.

In just a few months, 2021 will arrive with hopes of hugs and handshakes, approved vaccines, a robust economic recovery, and a time when masks are only worn on Halloween! Unfortunately, we can’t control whether these will happen, but we can take control of our tax situation. Here are several things to consider before the calendar turns over.

Charitable Giving

There are several ways to give money to charities while receiving a tax benefit.

  • Giving Appreciated Investments. Consider giving appreciated securities to charities and avoiding a potential taxable capital gain when sold. Avoiding the capital gains tax is one benefit, a tax deduction for those itemizing their deductions is another potential benefit, and the charity wins.

  • Giving Cash. If you plan to take the standard deduction in 2020, you can deduct cash gifts to charities up to $300. Also, for 2020 only, the CAREs Act allows individuals and families to deduct cash gifts up to 100% of their Adjusted Gross Income.

  • Giving Household Goods. Donate household goods to get another deduction when itemizing. Even if you are not itemizing, you can still donate household goods. You won’t get a tax benefit, but you will free up some space at home.

  • Giving from your IRA. If you are over the age of 70.5, you can make charitable gifts today from your IRA. If you are going to be 72 or older in 2021, you can wait until January and make your 2020 intended gifts in 2021 and your 2021 intended gifts. A double gift from your IRA in 2021 can count toward your 2021 RMD. The benefit of giving to charities from your IRA is that you don’t pay income tax as you do on the funds that you receive from your IRA.

Selling Assets for Gains or Losses

If you have unusually low taxable income this year, you might sell appreciated securities and pay a 0% capital gains federal tax. Please consult your tax advisor or research the income tax brackets to determine if you will be in a 12% federal income tax bracket or lower.

If you don’t want to exit a particular investment, you can sell a position at a gain and immediately buy the same investment so that you were never out. This works for harvesting gains, but won’t work for harvesting losses.

Selling investments for a loss can also help with your 2020 taxes. When harvesting losses, be sure not to purchase the same investment within 30 days before or after the sale. This is a wash sale and you will not be able to use the loss to reduce your income tax.

Spend Down Your Flexible Spending Accounts

Flexible Savings Accounts (FSA) are notorious for a “use it or lose it” rule. If you took the time to fund an FSA with pre-tax dollars, be sure to use it to its full advantage. Spend down all money that you would otherwise lose on January 1st.

Retirement Savings and Health Savings Accounts

If you are a self-employed individual and want to fund a solo 401(k) to receive a tax deduction for 2020, you must open the account in 2020. You can fund the solo 401(k) any time before filing your taxes in 2021, but the account must be established during the calendar year.

IRA and Roth IRA contributions have an April 15th deadline, but employer sponsored retirement plans (such as a 401(k) or 403(b)) need to receive contributions by December 31st. Your contribution to an HSA also needs to be received by December 31st.

529 College Savings Plans

Indiana residents can get an Indiana state income tax credit by contributing money to an Indiana 529 account. The credit is equal to 20% of the contribution, with a maximum credit of $1,000. You do not have to be the owner of the account to make a contribution and receive a credit.

Summary

Spend some time now getting your 2020 tax picture in order and then start dreaming of 2021. Just imagine it: Colts in the playoffs in January and maybe February, people actually attending the Indy 500 in May, and your ideal family vacation in the summer. After all, the year of the ox has to be better than the year of the rat.

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Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.

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