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Tax-Savings Strategies You Should Make Before the End of the Year

Key Takeaways

  • Many high-income individuals could be facing higher tax rates soon, although no one knows the extent of those changes. It is far better to plan than to guess.
  • You cannot go wrong by maximizing your charitable, retirement, and health savings account (HSA) contributions.
  • Consider taking required minimum distributions (RMDs) for the 2020 tax year, even if you are not required to do so under the CARES Act.
  • If you received a PPP loan for your business, consider setting up a reserve for extra withholding if you think the loan may be forgiven.

This year is rapidly ending and for many people, it will not be soon enough. The COVID pandemic brought unprecedented challenges, but I am optimistic about the new year. Thanks to great progress on the vaccine front, I look forward to the positive effects it will bring to our personal and economic lives. As we close out 2020, now is the time to take one more look at your financial situation to ensure you have maximized as many tax-savings opportunities as possible.

Rates are very likely to change in 2021 and beyond. For high-income earners, those rates will likely be higher, not lower. In response, here are six strategies that many of our clients are considering:

1. If you are age 70 ½, make qualified charitable contributions (up to $100,000) from your IRA directly to a 501c (3) charity. Based on the current itemized deduction limitations, this is the most efficient way to contribute to charity.

2. Maximize your retirement and 401(k) contributions. For 2020, the 401(k) deferral limits are $19,500 for individuals under age 50 and $26,000 for individuals aged 50 and over.

3. Maximize your HSA contributions if eligible to do so. For 2020, the contribution limit is $3,550 for individuals and $7,100 for families. If you are age 55 or older, you can contribute an additional $1,000 to your HSA. Finally, consider investing in your HSA for the long-term.

4. Consider giving long-term appreciated securities to a charity or a donor-advised fund. You will receive a tax deduction for the fair market value of those assets and avoid capital gains taxes on those assets. Also, based on your itemized deduction limitations, it may make sense to bundle your contributions into a single year to maximize your long-term tax benefits.

5. If you received a PPP loan for your business, consider setting up a reserve for extra tax withholding. The current IRS ruling about PPP loans states the expenses related to the loan forgiveness are nondeductible. If your loan is forgiven, this essentially makes the loan a taxable event. Also, in Revenue Rule 2020-27, the IRS determined the expenses would be nondeductible in 2020 regardless of when forgiveness is applied for. Keep that in mind if you reasonably expect your loan to be forgiven.

There is speculation that Congress may act to overrule the IRS’s determination that PPP expenses are nondeductible, but the probability and timing of that happening is unknown. For year-end tax planning purposes, you may need to increase your withholding or estimated taxes to cover the additional tax on the loan forgiveness and nondeductible expenses.

6. Consider taking RMDs from your IRA for 2020 even though the CARES Act removed the requirement to do so. Two benefits to this are:

  • This will help you distribute assets that maximize lower tax rates, especially if you think your taxes may be going up in the future.
  • By converting a portion of your IRA to a Roth IRA, you receive tax-free growth going forward and your Roth IRA assets are not subject to RMD rules. A Roth IRA is also a great asset to give to your heirs.

The Tax Impact Ahead

No one knows the extent of the Biden administration’s impact on taxes, but it’s best to prepare for higher rates in many sectors of your financial life. The Georgia state Senate runoff on January 5th will determine which party controls the U.S. Senate. If Republicans maintain the U.S. Senate majority, there may be little change to tax policies. However, if both Democratic candidates win the Georgia runoff, there is a chance that personal and corporate tax rates will increase at certain income levels (again those levels are unknown as we go to press).

Further, the Biden administration has proposed reducing the estate tax exemption and potentially removing the ability to step-up the basis on assets to fair market value on the date of death. However, in my experience, the final tax policy changes rarely reflect the initial proposals. This theory may be especially true if the Democrats gain a slim majority in the Senate.

Plan Ahead with Taxes

Tax planning is unique to everyone – there is no one-size-fits-all strategy. If you or someone close to you has questions regarding the items discussed in this article or any other matters related to your specific situation, please feel free to reach out to your Soundmark advisor.

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Todd Flynn, CPA, CFP® is a Principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other high-net-worth individuals to help them define their financial goals and implement an ongoing financial planning process.

This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Soundmark Wealth Management, LLC, its advisors and its affiliates do not provide tax or accounting services. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax or accounting advice. Please consult with your tax advisor prior to engaging in any transaction.

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