8 Year-End Tax Planning Tips

8 Year-End Tax Planning Tips

8 Year-End Tax Planning Tips

* This article was originally published on November 21, 2018. It has been updated for 2020.

For many, tax season is a looming enigma. And that may be especially true for this 2020 tax year due to pandemic-related tax law changes — and the planning opportunities they can bring.

Come tax time next year, will you have to pay in? Will you be getting a refund? How much? Could either outcome affect your daily life or how quickly you could achieve that next big life goal?

With a little planning, your 2020 taxes don’t have to be shrouded in mystery.

What is tax planning, you ask? It’s a periodic check-in on your tax situation that allows you opportunities to adjust your finances, plan for open enrollment, and tweak your investments to make the most of your money. How? It’s a view of what you can expect in terms of taxes for the year that gives you time to adjust your finances to better meet your needs.

Now that we’re in the fourth quarter of the year, isn’t it time you did a little end-of-year tax planning of your own? Here’s where you can start.

Year-end tax planning 101

Take a look at your most recent pay stub. What do your gross — aka before-tax — earnings and total withholdings look like? As you plan for tax season, will you be set to receive a big refund or could you end up paying a large amount?

Begin by striking the right balance with your remaining paychecks for the year, working to stay within $1,000 on either side of zero come tax time. Here’s why: If you’re set to receive a large refund, you’ve been giving Uncle Sam a big interest-free loan; if it looks like you’ll owe quite a bit in taxes due to too-low withholding throughout the year, you’ll owe Uncle Sam money — and possibly a penalty. Tax planning can help you get to the side you want to be on without reaching either extreme.

After you’ve reviewed your pay stub and adjusted your withholding amount, if necessary, it’s time to dig into your basics and benefits. You can follow this list in order, skipping over the items that don’t apply to you and digging deeper into those that affect you more.

1. Will you itemize or take a standard deduction? It’s important you understand the increased standard deduction amounts as you evaluate your numbers and consider whether you can itemize. Could you fare better with a standard deduction for this year?

The standard deduction for 2020 is now $12,400 for an individual or $24,800 for married couples. Based on these numbers, it might not only be easier but also more financially beneficial to take a standard deduction, even if you’ve itemized in the past.

2. Share the love. Will you be itemizing your deductions this year? If so, consider donating to charity — and enjoying the potential tax benefit. It could be a win-win. To claim a deduction on a charitable contribution, keep in mind you’ll have to itemize deductions, which must exceed the standard deduction. If you’ll be itemizing and need the tax savings, consider moving your 2021 donations up to 2020. This will increase your total deductions for the year.

New for 2020
Individuals claiming the standard deduction can write off up to $300 of charitable cash contributions “above the line” in 2020.

For itemizers, there’s normally a 60% Adjusted Gross Income (AGI) limit on deductions for cash charitable donations. The CARES Act made it so you can deduct 100% of your AGI for 2020 for cash donations to qualifying charities (donor-advised funds and private nonprofit foundations are excluded).

3. Harvest your losses. Ever heard of tax-loss harvesting? Picture this: You have a loss on an investment, so you sell that investment and reinvest the funds into something else. Now you have a capital loss that you can use to offset capital gains or up to $3,000 of ordinary income. At the same time, assuming your replacement investment is similar — but not identical — to the investment you sold, your portfolio should still be invested appropriately.

It can all add up to tax savings, so review your taxable investment accounts toward the end of 2020, and consider whether you can harvest any tax losses. Be careful that you do not buy an identical investment — in any account you own — 30 days before or after the date you sell an investment for tax-loss harvesting.

4. Double your money. If you haven’t contributed enough to your workplace retirement plan to receive your employer’s full dollar-for-dollar match yet, now’s the time. It’s usually up to a certain percentage of your gross income, so focus on contributing as much as possible at least up to that amount, investing more if you can to get more of your dollars into your retirement account and out of your taxable income. Why now? You likely still have a few paychecks coming through before the end of the year, and the “free money” match expires at when the clock strikes midnight on New Year’s Eve.

5. Minimum distributions are not required for 2020. If you have a Beneficiary IRA or turned 70½ in 2019 or earlier and have your own IRA, you would normally need to take your required minimum distribution (RMD) from that IRA for 2020 before the end of the year. However, the CARES Act waived RMDs for the 2020 tax year.

6. Give it away. You can gift up to $15,000 — $30,000 as a married couple — to any individual gift-tax-free until Dec. 31, 2020 and without having to file a gift tax return. Want to give more? Typically, you could gift plenty more without paying any gift tax, but you’d have to file a gift tax return if you give anyone over $15,000 — and you’d be using up some of your lifetime gift and estate tax exemption, so gift wisely.

7. Save for school in style. You can invest up to $15,000 per beneficiary in a 529 college savings plan this year without filing a federal gift tax return. There’s also a caveat you can use to your benefit: You can also “gift ahead” $15,000 for each of the next five years, meaning you can invest up to $75,000 per beneficiary without using any of your lifetime gift and estate tax exemption.

8. Prepare for the worst, hope for the best. With year-end coming up and tax season a few months away, it’s also time to check in on your emergency fund. Your emergency savings can help in the event you receive an unexpectedly hefty tax bill, allowing you to stay on track to reach your short- and long-term goals.

Simple Tax To-Dos

Clearly, there’s a lot to consider when it comes time for year-end tax planning, and it can be a lot to think about and do — especially if you wait. So grab that last pay stub, see what your tax situation looks like compared to your financial planning expectations, and make any year-end adjustments necessary to keep you on track today.

Making good tax decisions now can also set you up for success in the year to come, so consider how the changes you make today could affect you in 2021. You may want to keep a few other tax-planning considerations in mind as their deadlines can fall after the end of the calendar year, like: Investing in your health savings account, adding funds to your traditional or Roth IRA, and contributing the right amount to your flexible spending account (FSA).

You have until Tax Day 2021 to make an IRA or Roth IRA contribution for tax year 2020, and you can invest up to $6,000 in your IRA — $7,000 if you’re 50 or older. And although you can’t change your regular FSA contributions until your employer’s next open enrollment period, you may be able to invest in your health savings account (HSA) outside of payroll to provide yourself with additional tax-advantaged savings. Also, while you may be able to carry over $500 in your FSA in some plans, be sure to spend or withdraw the money from your FSA by the last day of your benefits year to avoid forfeiting all or a portion of it.

After you’ve completed your year-end tax planning, do yourself — and your finances — a favor by setting a reminder on your calendar for your next tax-planning check-in. Don’t forget: Tax Day is April 15, 2021.

If you have year-end tax planning queries or other financial planning questions, just ask!

Interested in meeting with us to begin the path to your financial future? We’re accepting new clients, and you can start with a no-cost web or in-person consultation.

Jason Speciner
Jason Speciner

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of fee-only firm Financial Planning Fort Collins. He is also a member of the National Association of Personal Financial Advisors (NAPFA), Financial Planning Association (FPA), and XY Planning Network. Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.