Skip to Content

End of Year Tax Planning
November 2020

Nov 30, 2020 | Business Owners | Cash Flow | Families | Retirees | Today's Professionals

As this year ends, we’d like to remind you of some tax planning strategies that you might wish to consider:

Charitable Giving Strategies – If you have charitable inclinations, this may be a time of year when you are thinking about how to best support the causes that matter most to you. This year only, it may be possible to reduce your federal taxable income to $0 through charitable contributions.

o Donor Advised Funds: Accounts specifically created for a charitable purpose allow for planning flexibility and ease of administration for people with charitable intent. You can use Donor Advised Funds to donate appreciated assets to charities, while eliminating the administrative burdens of dealing with stock gifts for smaller charities. In addition, Donor Advised Funds can be used to do a charitable bunching strategy, which is a way to achieve the maximum deductibility of charitable gifting with the higher standard deductions

o Qualified Charitable Distributions (QCDs): If you are 70 ½ or older, you can make distributions from your IRA directly to the charitable causes that are important to you. The effect may be to reduce your Adjusted Gross Income, which may impact how much of your social security benefits are taxed, how much of your medical expenses are deductible, and how much you pay for Medicare premiums. Note, however, that your custodian will not report which of your distributions were to charities. Therefore, you should keep good records of your charitable distributions.

o Donation of Appreciated Assets: If you have stocks or funds with low cost basis, you can donate these directly to a charity (or first to a Donor Advised Fund, then the charity). By donating appreciated assets, you may receive a charitable deduction, and you will not pay taxes on the capital gains.

Low tax bracket income realization strategies – If you are in a low tax bracket, you may wish to intentionally realize income this year to lock in the low rate.

o Convert some Traditional IRA assets to Roth IRA assets: You will pay the tax at your current rate, reducing your future required minimum distributions, and, if there are assets remaining upon your death, eliminating future taxes for your heirs. In addition, any future appreciation on the assets in the Roth account will be tax-free.
o Realize capital gains: If your portfolio includes taxable (non-qualified) accounts that hold assets that have greatly appreciated in value, and you are in a low tax bracket, it may be possible for you to realize capital gains with 0% federal tax. You may still have state taxes to pay.

High tax bracket income deferral strategies – If you are in a high tax bracket and anticipate being in a lower tax bracket in the future, you may wish to defer income this year into future years to allow for tax-deferred growth and realization of income at a potentially lower tax bracket.

o Retirement plan contributions: If your employer offers a retirement plan or if you are self-employed, you can contribute pre-tax dollars to a retirement plan (401k, 403b, SEP, SIMPLE IRA, or Traditional IRA) to allow them to appreciate tax-deferred. For the self-employed, a Solo-401k can allow you to maximize tax deferral. While you do not have to contribute before 12/31, you do have to set up your Solo 401k before 12/31 (and the sooner, the better!).
o Defer income realization or accelerate expenses: If you expect to be in a lower tax bracket next year, you may consider asking your clients to defer paying your invoices until January, or you may wait to send out invoices. If you are a cash-basis taxpayer, consider depositing checks after January 1.
o Health Savings Accounts: If you participate in a High Deductible Health Plan (HDHP) for your health insurance, you can contribute to a Health Savings Account. The powerful HSA allows you to either defer taxes (if you take distributions out in retirement for reasons other than healthcare) or never pay taxes on earnings (if you use the distributions for medical purposes).
o Realize Capital Losses: If you have assets in your portfolio that have a capital loss, selling those assets allows you to offset capital gains. You can also use up to $3,000 of capital losses to offset ordinary income.
o 2020 Only: Do not take IRA distributions: The CARES Act eliminated required distributions from retirement funds for 2020. If you are in a high tax bracket from other sources of income, you may decide not to take any distributions from your IRA or 401k this year.

Tax Credits and other deductions:

o Contribute to 529 Education Savings Plans: Some states, including Vermont, offer a tax credit for contributions to education savings plans. Other states, including Georgia, allow you to deduct contributions from your taxes. Follow your state’s guidelines to ensure that you get the credit or deduction as intended.
o Make energy efficiency improvements to your primary residence: For 2020, you can receive a 26% federal tax credit for some alternative energy home improvements and 10% for some HVAC upgrades to more energy efficient models.

These are some of the most common strategies. Everyone’s situation is different, and these strategies may come with caveats. Be sure to consult with your financial planner or tax advisor to confirm if the strategies that interest you will work as intended.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Pathway Financial Advisors, LLC-“Pathway”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Pathway.  Please remember that if you are a Pathway client, it remains your responsibility to advise Pathway, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Pathway is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Pathway’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Pathway does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Pathway’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.