Whether you are a pre-retiree in your accumulation phase or are already retired, your tax planning strategy should always be on your mind. The end of the year is rapidly approaching, which means some important tax-planning deadlines are approaching, as well. Now is the time to take a look at your finances and evaluate if any of the following strategies could benefit your 2020 tax return.
1. Tax-loss Harvesting
Tax-loss harvesting is the process of selling off assets that have recorded a loss in order to offset ordinary income and/or any reported capital gains you may be grappling with at the year’s end. Because capital gains distributions are fairly common with mutual funds, mutual fund holders may want to look for other losses they can sell before December 31st to reduce their tax liability. Even a mutual fund held for less than thirty days at the end of the year can be subject to capital gains on the year’s worth of the fund’s growth.
However, investors must be wary of conducting a “wash-sale,” or selling an asset and buying the same or nearly identical one within a thirty-day period.[i] The IRS will deny your claim of loss if you do so. Either wait the thirty-one days to re-buy the asset, or choose can asset to acquire that is dissimilar enough not to disqualify your sale.
2. Retirement Contributions to 401 (K) Accounts
Contributing the maximum amount to your retirement plans helps in two highly beneficial ways. Not only does it allow you to increase the amount of your total retirement savings, but can also work to lower your taxable income in the year the contributions are made if you contribute to a pre-tax account. First, fund accounts that offer an employer match to take advantage of the maximum employer contribution. Then, consider contributing more to other IRA accounts. Keep in mind, though, that the 2020 contribution deadline for a Roth or Traditional IRA isn’t until April 15th, 2021 (unless the deadline is extended such as it was in 2020 due to COVID-19), so you have some extra time to maximize those contributions.
3. Required Minimum Distributions (RMDs)
RMDs are the minimum amounts retirees must withdraw from their retirement accounts in any given year. This generally begins after age 72. If the accountholder fails to do so by the deadline of December 31st, they face a 50% tax penalty on the amount that should have been withdrawn. [ii]
However, due to COVID-19 and the passage of the CARES ACT, RMDs have been waived for 2020.[iii] As such, if you do not need the funds to cover living expenses this year, you may consider keeping your funds invested and avoid paying the associated taxes.
4. Making Charitable Contributions
Whether you donate cash, stocks, bonds, or even real estate, you have until December 31st to make charitable contributions to potentially offset your income. The rules for 2020 have changed a bit, though, under the CARES Act. This year, taxpayers who take the standard deduction have up to $300 available ($600 for married couples). [iv]
Individuals and corporations who itemize, however, can make much greater contributions—up to 100% of their 2020 Adjusted Gross Income (AGI). Previously, this number was only 60%. Corporations can deduct up to 25% of their taxable income, which was previously only 10%. [v]
However, keep in mind that these higher limits are only available if the donations are made to a public charitable foundation and do not apply to Donor Advised Funds (DAF). If you wish to contribute to a private foundation or a DAF, the old limits still apply.
Additionally, individuals over age 72 have the luxury of considering a Qualified Charitable Distribution (QCD), or directing up to $100,000 straight from their Individual Retirement Accounts (IRAs) to qualified charities.[vi] Reducing the IRA balance can reduce the accountholder’s taxable income in the future, lower the total estate liability, and even limit the potential beneficiary’s tax liability.
5. Tax-Free Gifting to Family
The IRS permits individuals to gift up to $15,000 a year to family members tax-free. [vii]The benefit here is reducing the size of your estate if estate planning is on your mind and helping family members today, versus in the future.
Weighing Your Options
If you and your family are unsure if any of these strategies would be right for you, the advisors at URS Advisory are here to help. We specialize in helping pre-retirees and retirees maximize their retirement savings, which in turn, means also limiting their tax liabilities. We will also work alongside your CPA to ensure seek the most beneficial outcome for your situation. Schedule a complimentary conversation with our team today to learn more.
[i] https://www.irs.gov/forms-pubs/about-publication-550 30 October 2020