Year-End Tax-Planning Tips to Consider

We are quickly approaching the end of the year and wanted to share our year end tax planning tips – a number of which are related to COVID-19.

Charitable giving

In 2020 only, all taxpayers can make an above-the-line $300 charitable gift whether they itemize or not. As usual, those contemplating making larger gifts should consider donating appreciated stock or cash into a donor-advised fund or as a direct gift to a charity for even greater tax benefits. For 2020 only, cash can be gifted up to 100% of adjusted gross income (AGI), though appreciated stock remains limited to 30% AGI. One important exception is that the cash gift cannot be contributed to a donor-advised fund.

If you’re unsure how much you can give and still maximize your deduction, consult your tax preparer. In some cases, you may want to ‘clump’ contributions for multiple years of planned giving into a single tax year. Our deadline for completion of most gifts of stock or cash from your portfolio is December 15th, so please plan accordingly.

Required Minimum Distributions (RMDs)

Many clients in retirement accustomed to annual Required Minimum Distributions took a break from doing so in 2020 when the CARES Act suspended RMDs for the year. RMDs are set to resume in 2021 and anyone who suspended their 2020 RMD will not be required to distribute two in 2021. If your RMD would otherwise make up a significant portion of your taxable income you will likely find yourself in a low income tax year, which could create additional tax planning opportunities.

Those of you accustomed to making charitable gifts from your IRAs, called Qualified Charitable Distributions (or QCDs), are still able to do so despite the 2020 RMD waiver. While such activity won’t lower your taxable income this year, it still allows you to use pre-tax dollars to satisfy their charitable intent.

529 College Savings Plans

Parents or grandparents who received a refund of college expenses originally paid by a 529 plan are required to return that payment to the 529 plan within 60-days of receiving the refund. Amounts not returned are subject to income tax and a 10% penalty.

Low income year?

Consider a Roth conversion of a regular or traditional IRA account. Harvesting capital gains or accelerating income this year may also be advisable. Your tax preparer can help you determine the impacts of a Roth conversion or acceleration of other income this year.

Other COVID-19 related considerations

Coronavirus-Related Distributions are permitted from retirement plans up to $100,000 and are exempt from the 10% penalty (if under age 59.5) and mandatory withholding. Taxes on the distribution can be spread across three years and the distribution is eligible to be repaid within three years as well. However, you must be able to prove you experienced adverse COVID-19 related consequences to qualify. We’re not seeing many clients use this provision, but it is available through the end of the year.

Upcoming changes to tax law

At this point it is still too early to do anything other than speculate how and when income and estate taxes may change in the future due to recent elections. Accelerating income, deductions, or estate gifts this year with the expectation of future tax increases should only be done after careful consideration.

State level changes in California due to Proposition 19 will positively impact homeowners’ ability to relocate in state and still retain their property tax basis, while making it more difficult to pass on their property tax basis to children after death. Property owners with multiple real estate holdings may want to consult a tax attorney to devise a plan before the law takes effect next February.

Please feel welcome to call us if you have any questions about year-end tax planning.


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