Tax Saving Tips for Individuals in 2020

Who could have ever seen taxes becoming a current event topic in 2020? I didn’t. But just a few months into 2020 we found ourselves watching our news feeds looking for the next stimulus package or analysis of the prior ones.

I know we are ready to put 2020 to bed and what better way to do that than with a little planning to save some tax dollars. Below are some ideas to get the conversation started with your tax advisor.

CARES Act

Under this act, individuals received payments of $1,200, marrieds received $2,400, plus $500 for each child under the age of 17. These payments began to phase out if the individual’s Adjusted Gross Income (AGI) exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household).

These payments were a credit that will be recomputed on our 2020 income tax returns. If the recomputed credit is higher than the amount received, the taxpayer will get an additional credit. If you are close to the AGI threshold, use some of the techniques below to reduce your AGI.
You’ll find your AGI on the first page of your tax return. Deferring income to 2021, increasing contributions to deductible retirement plans and health savings accounts, tax-loss harvesting, qualifying education expenses (using the Tuition and Fees deduction) and charitable contributions up to $300 can all reduce your AGI.

Charitable Deductions

The 2020 standard deduction for married taxpayers is $24,800, $12,400 for singles. The cap on state, local, and real estate taxes you can take as itemized deductions is $10,000. These two facts mean that a much smaller percentage of the population will itemize their taxes every year.
If you are a giver to charities, bunching your charitable contributions may allow you to itemize in high giving years and take the standard deduction in lower giving years.

You can bunch charitable contributions by giving to your charities every other year or every few years. You could also use a Donor Advised Fund. A DAF allows you to make your contribution in one year (and take the deduction in that year) while deferring the timing of the donations to the charity.

To count on your 2020 taxes, checks to the charity of your choice must be in the mail by year-end. Contributions made on credit cards can be taken in the year you contribute. It does not matter when you pay the credit card bill.

If you can, donate appreciated property to charities. In most cases, you can deduct the full value, and you nor the charity pay taxes on the appreciation.

Don’t donate property that has declined in value since you acquired it. You’ll waste the capital loss that way. You are better off selling the asset, claiming the capital loss, and then donating the proceeds.

Required Minimum Distributions (RMDs) are optional in 2020. If you still plan to take RMDs, consider making your charitable contributions from your IRA by making a Qualified Charitable Distribution. A QCD gets the money to your charity of choice, excludes the distribution from taxable income and helps you meet your required minimum distributions.

The CARES Act added a $300, before AGI, deduction for charitable contributions and temporarily suspended the 60% AGI limitation on charitable contributions.

Medical Expenses

If you itemize and your medical expenses have topped the 7.5% of AGI threshold or are getting close to it, consider getting and paying for needed medical expenditures before the year-end.

Home Loan Interest

If you itemize, you can deduct mortgage interest on qualified mortgages up to $750,000 if you incurred the debt after December 15, 2017. Interest paid on mortgages for second homes can be deducted up to the combined $750,000 limit.

You can even prepay your January 2021 mortgage payment in December to add to your deductible interest.

Interest on home equity lines of credit remain deductible only if the loan proceeds are used to “buy, build or substantially improve” the home that secures the loan. Plan accordingly to maximize this deduction.

Tax Arbitrage

A very cool sounding term for taking advantage of lower tax rates by deferring or realizing income when tax rates are lower. Traditional methods of tax arbitrage include deferring tax realization by postponing receipt of income through retirement savings and deferring Social Security and retirement plan distributions. You would only make these deferrals if you believed your income would be taxed at lower rates in the future – like at your retirement.

Tax reform and the presidential election have added new elements to the tax arbitrage discussion. Tax reform temporarily lowered tax rates. The tax rates are scheduled to go back up in 2026. Based on your situation, should you realize more income now at the lower rates before they go back up in 2026?

Retirement Planning

The temporarily lower rates created by tax reform also impact your retirement planning decisions. Based on your situation, is it better to invest in a Roth IRA and pay taxes now rather than deferring taxes using a traditional IRA? Should you consider converting a traditional IRA to a Roth and incurring the taxes on that conversion while rates are temporarily low?

Child Tax Credit

Tax reform eliminated personal exemptions but doubled the Child Tax Credit to $2,000 for each qualifying child under the age of 17. Planning tip: Social Security Numbers must be issued before the due date of the tax return including extensions. Make sure you have social security numbers on hand for every child you plan to claim the credit for.
529 College Savings Plans – 529 plans have been a great way to prepare for college costs while saving on state taxes. Distributions from 529 plans can also cover up to $10,000 of educational expenses for designated beneficiaries at public, private or religious elementary or secondary schools.

Georgia allows an $8,000 state tax deduction per beneficiary for joint filers and $4,000 for all other filers. 529 plans are a great opportunity to reduce your Georgia taxes while making a lasting difference in the lives of others. In Georgia, you have until April 15, 2021 to make 529 plan contributions that will be deductible in 2020.

Tax Loss or Gain Harvesting

If you have investments with losses that you’d like to sell, you can do so before the end of the year and take those losses on this year’s taxes.
If you have loss carryforwards, you can sell appreciated assets and use the carryforward to offset the gain. You can then buy back the investment and have a stepped-up basis. If you are harvesting losses, wait 30 days before you buy the investment back or you’ll fall under wash sale rules.
Mutual Funds – Be wary of buying mutual funds in your taxable portfolio at the end of the year. If the fund pays a dividend in 2020, you’ll have to pay tax on it and the fund’s share price will decrease by the amount of the dividend. Not fun!

Minimum Distributions

All 2020 RMDs can be deferred and the age for taking RMDs was pushed back from 70 ½ to 72.

Bonuses

If you are fortunate enough to receive a year-end bonus, consider contributing it to your 401(k) or another retirement plan if you haven’t maxed out your contributions. You’ll save on taxes this year and your funds will grow tax-free until you distribute them.

Disclaimer: There are a ton of details and nuances to all this stuff, so please do not consider this column legal or tax advice. Talk to a qualified tax advisor to find out which of these planning opportunities make sense for you and your family.

Are you ready to invest in your business to create long-term, sustainable growth? Head over to our Resource Page to find great tools to get you started.