Ten Tips To Cut Your 2020 Taxes

Even during a Pandemic, it’s still prudent to take steps to minimize your tax bill. Plus, this year we are faced with the prospect of higher tax rates starting in 2021.

As the year winds down, now is the time to take steps cut your 2020 tax bill while also not pushing too much taxable income into 2021 in anticipation of higher tax rates. Prior to December 31st:

  1. Increase your 401(k) and 403(b) contributions if you haven’t been contributing at the maximum rate all year. This year you can put up to $19,500 into your 401(k) or 403(b) plan at work. Anyone 50 or older by December 31st can put away an additional $6,500 for a total of $26k. Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.
  2. If you’re self-employed, consider setting up a Solo 401(k) by 12/31. A Solo 401(k) plan lets a self-employed person hit the $57k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $63.5K into a retirement plan for 2020 versus $57k into a SEP IRA.
  3. Take a look at your withholdings and instruct your employer to withhold additional taxes to avoid getting hit with an underpayment penalty if you haven’t had enough taxes withheld during the year. (Take a look at the IRS’ Withholding Calculator to set your withholdings for 2021.)
  4. Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including capital gain distributions from your mutual funds). Excess losses can then be used to offset up to $3,000 of wages and other income while any losses still remaining get carried over to next year. Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the “wash sale” rules.
  5. Consider selling your investments held more than one year that have increased in value if you are in the two lowest tax brackets since the long-term capital gains rate for you will be 0%. You can then buy back those securities, and the “cost-basis” will be the higher amount. Wash sale rules don’t apply to securities sold at a gain. This strategy will save you taxes down the road when you sell these securities. Just make sure that the capital gains realized don’t push you out of the 22% tax bracket since you’ll be taxed on those long-term capital gains that fall outside that bracket at 22%.
  6. Send in your January 2021 mortgage payment early enough so it will be processed prior to 12/31/20. By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier if you will be itemizing your deductions.
  7. Clean out your closets and donate your clothing and household items to a charitable organization, since “non-cash” contributions are deductible if you itemize. Don’t forget to get a receipt. And you should make a list of each item donated, along with its condition, and snap a few photos as well. Remember, only donations of clothing and household items in “good condition or better” qualify for a deduction.
  8. For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year’s return, even if you don’t pay your credit card bill until 2021. And you always have the option of donating appreciated investments to charities or a Donor Advised Fund. You get to claim your donation based on the value of the assets donated without paying any capital gains taxes on the appreciation. (Use this IRS tool to confirm a charity as legitimate.) Don’t donate investments that have decreased in value. Instead, sell them first, take the loss on your taxes, and donate the money received from the sale.
  9. Pre-pay your projected state tax shortfall if you’ll be itemizing your deductions and will have less than $10k in state income taxes and real estate taxes combined..
  10. Pre-pay and pay off your medical bills if your total medical expenses exceed 10% of your income and you itemize.

Lastly, as a bonus year-end planning tip, don’t forget that you have 180 days from the date you realize a capital gain to invest up to the full amount of the capital gain into an Opportunity Zone fund and defer paying income taxes on your realized gain.

And, as always, evaluate whether you’ll save any taxes by postponing 2020 income or deductions into 2021 or by accelerating 2021 income or deductions into 2020. With Biden taking office in January, don’t overlook that tax rates will most likely be increasing starting next year.

Schedule C individuals – Review Your Business Bottom Line

For Schedule C individuals (sole proprietors and single member LLC’s), the days between Thanksgiving and Christmas are the perfect time of year to review your business’s “bottom line” for the year.

If you find your net income significantly ahead or behind compared to your prior year net income – reach out to your tax preparer to discuss if you may need to revise your quarter 4 estimated tax payments.  Also, if you collected Pandemic Unemployment Assistance (PUA), be aware this governmental aid is taxable income.  As the Pandemic has turned so many peoples’ financial situations upside down this year, taxpayers should take this final month of the year as an opportunity to plan for 2020 as well as 2021.

Are you turning 50?

Are you reaching your milestone birthday of turning age 50 in 2021?

If so, don’t forget about the “catch-up” provision for 401k and 403b salary deferral retirement plan contributions.  For 2021, the max salary deferral into your retirement plan is $19,500.  However, if you are age 50 or older, you can make an extra “catch-up” contribution into your retirement plan via your salary deferral in the amount of $6,500 annually.

No need to wait until your birthday to increase your allowed contribution amount – taxpayers qualify for the full amount of the “catch-up” contribution in the year they turn 50.  Thus, you can increase your deferral amount beginning in January 2021 even if you do not turn age 50 until later in the year.

And if you turned 50 in 2020, you can take advantage of the “catch-up” deferral in the last month of the year if you missed out on this “bonus” contribution earlier in the year.

Two Charitable Donation Updates for 2020

For 2020 there is a new $300 charity deduction that will benefit taxpayers who claim the standard deduction.

Typically, charitable donations are allowed as a tax deduction only to taxpayers who itemize their tax deductions on their tax return and not allowed to taxpayers claiming the standard deduction.  However, beginning in 2020, taxpayers who do not itemize their tax deductions can claim a charity deduction, capped at $300, regardless of filing status.  Only cash donations paid directly to qualified charities will qualify for this deduction.  Non-cash donations do not qualify nor do donations to Donor Advised Funds.  If you take the standard deduction on your tax return, be sure to let your tax preparer know if you made any cash donations in 2020.

An alternative to donating cash to charitable organizations, is to donate long-term appreciated marketable securities.

This strategy allows individuals to avoid the capital gains tax they would incur by selling an appreciated investment and then donating the proceeds.  When donating appreciated stock, bonds, mutual funds and other similar investments taxpayers can claim a tax deduction equal to the market value of the security as of the date of the charitable donation.

Solar Panel Credit – Act Now

If installing solar power panels for your residence was a consideration for 2020 or 2021, now is the time to act.

The Federal Solar Investment Tax Credit has been one of the larger tax credits taxpayers have benefitted from the past few years.  Prior to 2020, taxpayers were allowed a tax credit on their tax return equal to 30% of the total installation and product costs of solar panels on their residence.  For the 2020 tax year that credit is now 26% of such costs.  And in 2021 the tax credit will drop again to 22% of the total cost.

Completion date is the key, not the date the project begins.  Taxpayers claim this tax credit in the year the project is completed and placed in service in your home.  Unless the credit is extended by the government, 2021 will be the final year individual taxpayers can claim this tax credit.  Thus, if you have been thinking about adding solar to your residence – now is the time to plan to be sure to have the job completed by the end of 2021, before this significant tax credit disappears.