Year-End Tax Strategies

Year-End Tax Strategies

| December 14, 2020
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It’s hard to believe the holidays are already here and the new year is just around the corner! While I’m sure most of us can’t wait to put 2020 behind us, before you mentally move into 2021, don’t forget to pay some attention to your taxes. Even though taxes are pretty far from festive, proactively planning can save you money—now that’s cause for celebration! Let’s take a moment to go over some year-end tax strategies that may benefit you in 2020.

Prepay Tuition

If you have a college student, consider paying next term’s tuition before December 31. Any tuition you pay for the first four years of undergraduate study is eligible for the American Opportunity Tax Credit. This can save you up to $2,500 per student on your tax bill depending on your expenses and income. (1) If you are the one doing the studying, you may be eligible for the Lifelong Learning Credit. (2)

Contribute To A 529 Plan

If you’re still working on saving for your children’s college education, then you may benefit from putting some money into a 529 plan before the year’s end. This won’t help with your federal tax bill, but it might lower your state taxes. Many states allow deductions for contributions to the state’s 529 plan and some even allow them for contributions to other plans. (3)

Contribute To Charity

Contributing to charity can lower your tax bill if you itemize your deductions. And it doesn’t have to be just money that you donate. Clean out your closet and kitchen cabinets and take a box over to your local 501(c)(3) thrift store. As long as they give you a receipt for the donation, you will be able to itemize and deduct whatever the fair market value is for the items.

If you have appreciated stock, you can get an even greater benefit by donating it to charity. You get to deduct the fair market value of the stock as a charitable contribution and the charity is not liable for the capital gains. 

Open A Donor-Advised Fund

With the new, higher standard deduction created by the Tax Cuts and Jobs Act, many of those who are charitably inclined are considering donor-advised funds. Donor-advised funds work as charitable giving savings accounts where you get a deduction when you put the money into the fund, not when you distribute it to a charity. 

If your itemized deductions are close to the standard deduction, you can open a donor-advised fund and put a large sum of money into it in 2020. You get to take the tax deduction for this year but hand the money to charities in 2020. Then, in 2021, you may not have deductions for your charitable giving, but you can still take the standard deduction.

Take Your Required Minimum Distribution

If you are 72 or older, then you are required to take minimum distributions from your retirement accounts (except Roth IRAs). In the year that you turn 72, you have until April 1 of the following year. After that, the money must come out of your account by December 31. 

Normally, failure to withdraw the proper amount will subject it to a 50% penalty tax, so it’s important to make sure you take your required distributions by the end of the year. But since 2020 is far from a normal year, there are different rules. Under the CARES Act, you are not required to take RMDs in 2020. (4) Of course, if you need to take a distribution to pay your bills and maintain your lifestyle, you may, but there is no mandatory withdrawal amount. 

Convert Your IRA

If you have lower income than normal in 2020, then it might make sense to convert your traditional IRA to a Roth. In doing so, you would pay the income taxes on the money now, at your 2020 rates, so that you could take all withdrawals tax-free in retirement.

Another benefit of having your money in a Roth account is that it is not subject to required minimum distributions as discussed above. Once your money is in a Roth IRA, you can leave it in there to grow as long as you’d like.

Empty Your Flexible Spending Account

Flexible spending accounts are provided by your employer to allow you to make qualified dependent and healthcare payments pre-tax. However, they are “spend it or lose it” accounts where you can only roll over $500 from one year to the next. If you have a flexible spending account, make sure to spend the money before December 31 so that you don’t lose it. (5)

Harvest Your Tax Losses

The IRS allows investors to offset their capital gains by capital losses. If you own a losing stock, now might be a good time to sell it so that you can use the loss to lower your capital gains and, therefore, your tax bill.

Max Out Your Retirement Account

Another way to lower your income, and therefore your tax bill, is by deferring that income until retirement. In 2020, you can contribute up to $19,500 to a 401(k) plan, which will remove that money from your current taxable income. If you are 50 or older, your yearly contribution limit goes up to $26,000. You can put up to $6,000 in any type of IRA; $7,000 if you are over age 50.

Take Advantage Of Your HSA

If you have access to a health savings account (HSA) with your high-deductible health plan, you can enjoy triple-tax savings with no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. Your contributions are tax-deferred and withdrawals are tax-free for medical expenses. 

Since your balances roll over from year to year, you can max out the account without worrying about using it up right away. For 2020, the contribution limit is $3,550 for an individual and $7,100 for a family, with a $1,000 catch-up bonus for those over 55.

How We Can Help

As you can see, in the midst of finalizing holiday shopping and celebration plans, there are many prudent steps you can still take in the last few weeks of the year. Your plate is probably already full, so if you need help implementing any of these strategies or want to learn more about what we at HBA Wealth do for our clients, contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

About Haydel, Biel & Associates

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by  Haydel Biel & Associates or performance returns of any  Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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(1) https://www.irs.gov/credits-deductions/individuals/aotc

(2) https://www.irs.gov/credits-deductions/individuals/llc

(3) https://www.thebalance.com/best-states-for-college-savers-3193238#:~:text=Arizona%2C%20Kansas%2C%20Minnesota%2C%20Missouri,plan%2C%20not%20just%20their%20own.

(4) https://www.forbes.com/sites/jamiehopkins/2020/03/30/cares-act-drastically-changes-required-minimum-distribution-rules-for-2020/#5e23084719a0

(5) https://www.investopedia.com/ask/answers/111615/does-money-flexible-spending-account-fsa-roll-over.asp#:~:text=A%20flexible%20spending%20account%20(FSA)%20lets%20individuals%20put%20aside%20pre,FSA%20(%242%2C700%20for%202019).

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