This 2020 year has been one for the record books. As eager as we may be to move into a new year with a fresh start, we still have a few weeks remaining to make smart tax planning decisions before we flip the calendar. Check out a few tips below that can help you save on your taxes and potentially avoid headaches come tax time in April.
- Bunching Charitable Deductions – If you itemize your deductions and you anticipate your 2020 income being higher than your projected income in 2021, it would be prudent to bunch your charitable deductions in 2020 so that you receive more of a benefit in the current year.
- For instance, if you typically donate $20,000 per year to United Way, and your 2020 tax bracket is 37% as opposed to a projected 2021 tax bracket of 33%, consider donating $40,000 in 2020 to cover both years. This will take care of two years of donations while simultaneously giving you an extra 4% worth of a deduction.
- If you want to take it a step further, consider utilizing a donor advised fund to bunch your deductions and contribute highly appreciated stock instead of cash. This allows you to still accomplish the goals mentioned earlier, while also avoiding future capital gains tax on that stock.
- RMDs – In a typical year, the common suggestion would be to make sure that if you are older than 72, that you withdraw your Required Minimum Distribution (RMD) before the end of the year to avoid a penalty. However, the CARES act has waived RMDs for 2020. So, if you have yours set for automatic distribution in December and you do not need the money, be sure to defer that withdrawal until next year.
- General Tax Planning – Now would be a good time to reach out to your accountant, or tax advisor to do any year-end tax estimates for 2020.
- High income earners could be subject to additional underpayment penalties if under withheld throughout the year, so having a tax planner review your situation could result in hundreds and sometimes thousands of avoided penalties.
- For those who did part-time work this year, or may have been laid off, it may be worth doing a Roth conversion to take advantage of being in a lower than usual tax bracket.
These are just a few items to mindful of as we approach the end of the year. Be sure to reach out to your personal tax advisor/CPA, or your Redwood financial advisor for any tax planning assistance.