Choices made between now and end of year can and will significantly impact how much tax you owe come April 2021. CCHA is here with five tips to help guide your year-end tax planning, especially if you itemize deductions, are saving for retirement, or hold investments outside of a retirement account. As every circumstance is unique, CCHA recommends working closely with your CPA, to know where your business stands, to better inform your personal year-end tax strategy.
Here are five tips to consider when it comes to your estate planning through the end of 2020:
IRA Distributions. In response to COVID-19, Congress passed The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. One of its provisions was waiving Required Minimum Distributions (RMDs) for 2020. So, if RMDs are waived, why would you take funds out anyway? Historically low tax rates are the primary reason. Taking funds from your tax-invested IRA and paying taxes now (versus later), when there may be higher tax rates may be a smart move. You can use these RMDs funds to convert to a Roth IRA or purchase tax-free life insurance and can make 2020 IRA contributions until April 15, 2021.
Roth Conversions. Roth Conversion, at its highest level, is like prepaying your taxes at today’s comparatively low-income tax rates. The Tax Cuts and Jobs Act of 2017, which created historically low tax rates, expires in 2025. As such, converting tax-invested IRA funds to tax-free Roth IRA funds is a wise move to make. The catch is knowing how many additional funds you can convert without pushing you into a higher tax bracket. This is where CCHA recommends coordinating with your tax preparer, to avoid any surprises come Tax Day 2021.
Medical Deductions. For 2020, as was the case in 2019, medical expenses can be deducted to the extent the expenses exceed 7.5% of adjusted gross income. Eligible expenses include health insurance premiums (if not deducted elsewhere), prescription drugs, long-term care insurance premiums (subject to limitations), and medical and dental services. Expenses paid for medical care of a child for whom you provide more than half of total support may also be deducted.
Accelerate equipment purchases. Business owners can immediately write off the cost of new and used equipment purchases, following tax reform. Consider accelerating the purchase so you can deduct the expense on your 2020 tax return, if you’re contemplating investing in equipment anytime in 2021.
Sell loser investments to offset gains. “Loss harvesting” is a common year-end strategy that involves selling investments such as stocks and mutual funds to realize losses. Those losses can be used to offset any taxable gains you have realized during the year. Losses offset gains, dollar for dollar. If your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out other income. If you have more than $3,000 in excess loss, those funds can be carried over to the next year, which can be used to offset any 2020 gains, plus up to $3,000 of other income. You can carry over losses year after year for as long as you live.
The desire to understand and control your personal and family financial situation is typically the primary objective in developing a reasoned and comprehensive estate plan. Thoughtful and strategic estate planning is an important step in realizing that objective and CCHA can help you with this planning process. CCHA attorneys have assisted many families in transitioning their estates to family members in an efficient and tax-effective manner and are here to help assist with your estate planning needs, as well. Contact us for assistance with your year-end tax planning.
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