UPDATE: Your Year-End Tax Planning Checklist

Dec 14, 2020 |

NEW: 2021 Tax Planning Guide

This article reflects changes for 2020.

Even with less than three weeks remaining in 2020, there are still relatively simple end-of-year tax planning tactics available to help lessen the burden in April 2021.

Verify Withholding and Correct Underpayments

Now is a good time to double-check your withholding and make any necessary adjustments.

Although increasing your final estimated payment will only correct a Q4 2020 underpayment, increasing withholding can correct underpayments retroactively. IRS lumps all withholding payments together and treats them as though they were made in equal parts across all four quarters.

If you are working with a tax professional, they will likely have already done projections to ensure accurate estimated payments for investment and other income. But if you are doing your own taxes, visit the IRS withholding calculator and see what, if anything, needs to be done.

Max Out Your 401(k)

The maximum tax-deferred contribution to a 401(k) retirement plan has once again increased by $500, reaching $19,500 for individuals under age 50 in 2020. Individuals who are 50 or older by the end of the calendar year can make additional “catch-up” contributions of up to $6,500, for a total of $26,000 in 401(k) contributions in 2020. If you have celebrated, or will celebrate, your 50th birthday in 2020 and haven’t taken advantage of the catch-up contributions, there’s still time to do so before year-end.

Evaluate Charitable Contributions

As we outlined in an article earlier this year, the CARES Act provided new opportunities to extend your philanthropic impact in 2020:

Deductions: For charitable cash contributions up to $300, individuals who don’t itemize deductions will be able to take an above-the-line deduction. An above-the-line deduction reduces your taxable income dollar for dollar. To qualify, the donation must go to a charitable organization described in IRC Section 170(b)(1)(A). Excess cash contributions carried over from a prior year do not qualify for the deduction.

Contributions: In addition, adjusted gross income (AGI) limitations on charitable contributions for 2020 have been increased to 100 percent (from 60 percent) of AGI for individuals who itemize and 25 percent (from 10 percent) of taxable income for corporations. It is important to note that contributions into a supporting organization or donor-advised fund don’t qualify for these incentives.

The maximum allowable noncash charitable contribution remains at 60 percent of AGI. Contributions of long-term appreciated stock or property remain limited to 30 percent of AGI.

Maximize HSA Contributions

If you are eligible to contribute to a health savings account (HSA), remember that the IRS has increased the maximum allowed contributions to $3,550 for an individual or $7,100 for a family in 2020. Individuals who are 55 or older by the end of the calendar year can make additional “catch-up” contributions of up to $1,000.

Since money in an HSA account remains yours and contributions reduce taxable income, maximizing contributions is a smart tax planning move. Everyone eventually has medical expenses, and using pre-tax money to pay for them is almost as good as getting a 20 percent (or more) discount.

Verify IRA Distributions

The CARES Act waived the required minimum distributions (RMD) during 2020 for IRAs and retirement plans (including beneficiaries with inherited accounts). The suspension doesn’t apply to qualified defined benefit plans.

Year-End Gifting

The annual gift tax exclusion amount remains unchanged at $15,000 in 2020, and married couples can double that to $30,000. These tax-free gifts can be a useful estate planning tool. If you are not already taking advantage of the annual gift tax exclusion to move assets out of a potentially taxable estate, you should discuss such gifting with your estate planning team.

Final Words

Not every one of the above tips will be useful for every person. Still, anyone who is able to use more than a few of them may well be able to benefit from the more advanced personalized planning offered by our financial planning professionals.

This article was originally published on December 12, 2018. It was subsequently updated on November 8, 2019 and December 14, 2020.

NEW: 2021 Tax Planning Guide

Read more from our blog:

Let’s talk

Whether you have a specific question, or you’re interested in learning more about how our approach can be tailored to your situation, we’d love to hear from you.