SageVest Wealth Management takes a proactive approach in all facets of our advice, including tax planning. Many individuals are facing income and tax changes in 2020, whether due to Covid-19 impacts on your earnings, the waiving of RMDs, additional charitable giving or other adjustments. As the year is quickly drawing to a close, it’s time to focus on year-end tax planning opportunities that might be available to you.
Please contact us before November 30th to discuss tax considerations. This allows adequate time for planning and implementation of appropriate tax-planning strategies.
1. Contributions to Retirement Plans
Making pre-tax contributions to your work retirement plan is one of the best and easiest ways to reduce your taxable income, while also achieving your retirement saving objectives.
Traditional contribution limits for 2020 and 2021 are as follows:
|Plan Type||Contribution Limits  2020||Contribution Limits  2021|
|401(k), 403(b), TSP Elective Deferrals||$19,500||$19,500|
|- Age 50+ Catch-up||$6,500||$6,500|
|Solo 401(k) & SEP IRA Plans||$57,000||$58,000|
|Simple Elective Deferrals||$13,500||$13,500|
|- Age 50+ Catch-up||$3,000||$3,000|
|Traditional & Roth IRAs ||$6,000||$6,000|
|- Age 50+ Catch-up||$1,000||$1,000|
 Subject to income limitations.
 Note that contributions to Roth accounts do not reduce your current year taxable income.
Important Contribution Notes:
- Make sure you’re capturing employer matching contributions, which sometimes requires spreading your contributions throughout the year.
- If you’re self-employed, a solo 401(k) might increase your contribution potential. These accounts must be opened by December 31.
- If you’re 50+, don’t forget to elect additional catch-up contributions.
Contact us with your questions, or if you’re self-employed.
2. Required Minimum Distributions (RMD)
The passing of the SECURE Act in late 2019 changed the rules for Required Minimum Distributions (RMDs) extending the age at which distributions must begin to age 72 (or earlier for inherited IRAs).
However, the CARES Act of 2020 (enacted in response to coronavirus) waived all RMD requirements for the year 2020. No distributions are required this year, regardless of if you’re 72 or older, or if you own an inherited IRA.
Although you don’t have to take an RMD, you still might wish to do so for three primary reasons:
- You need the money to cover expenses.
- It makes sense to take a distribution (or perhaps elect a Roth IRA conversion) to take advantage of a low tax bracket.
- You’re age 70 ½ or older, charitably inclined and prefer to gift IRA assets.
3. Charitable Contributions
The charitable contribution landscape is important, but more complicated in 2020. Charitable organizations are serving critical needs during the global pandemic. Fortunately, the CARES Act increased charitable giving limits for tax year 2020 in an effort to incentivize charitable giving. This means you could gain greater charitable gift tax benefits this year. However, you still need to evaluate your ability to capture charitable deductions in light of new higher standard deduction amounts.
We offer the following considerations on charitable giving:
- Charitable Gifts of Cash: Cash gifts always command a higher deduction threshold as a percentage of Adjusted Gross Income (AGI). This is an important consideration if you’re making large gifts relative to your income. The CARES Act temporarily allows you to deduct charitable contributions up to 100% of your AGI (up from the previous 60% limit), with the caveat that contributions are made directly to the public charity. This means that you could technically negate all of your taxable income in 2020 if cash gifts are made directly to organizations. Conversely, if contributions are made to a charitable gift fund, the deduction limit remains at 60% of AGI.
- Charitable Gifts of Appreciated Securities: While you can always make gifts of cash, contributing appreciated securities (investments with inherent capital gain exposure) might allow you to receive a tax deduction while simultaneously avoiding a future capital gain tax liability. The recipient charitable organization gets the same financial benefit, and it doesn’t owe taxes upon selling the asset due to its tax-exempt status. Gaining an immediate charitable deduction while also avoiding future capital gains creates a double tax advantage.
Lower charitable deduction limits apply as a percent of your AGI, but the limits are still rather generous, allowing you to deduct up to 30% of your AGI. This limit applies regardless of whether contributions of appreciated securities are transacted directly to a charitable organization or to a charitable gift fund.
- Donor Advised Funds: Donor Advised Funds (DAFs) offer a powerful planning tool as you can aggregate several years of giving in one year for tax benefits. The full amount of your contribution is tax deductible (up to AGI limits of 60% for cash and 30% for appreciated securities) in the year that you make the contribution. However, you retain flexibility to distribute the fund balance to charitable organizations over a number of years. This strategy is increasingly attractive in light of higher standard deduction limits. If your itemized deductions before charitable giving fall short of the new standard deduction, you’re forfeiting some deduction benefit every year that you make charitable contributions. Lumping a number of years of giving in one year can help you to maximize your tax deduction benefits.
- Qualified Charitable Distributions: If you’re 70 ½ or older (despite the new RMD age of 72), the best technique for charitable giving might be to gift IRA assets as a Qualified Charitable Distribution (QCD). You can donate up to $100,000 per person, per year, directly from your IRA, and the value of your gift can exceed your RMD. QCDs count toward fulfilling your RMD, but are excluded from your income. This helps to reduce your taxable income, regardless of whether you itemize or not. This strategy is frequently very attractive to individuals subject to RMDs, but 2020 presents a new planning wrinkle in light of the fact that RMDs are waived under the CARES Act. You can still transact a QCD, but you’re not reducing taxable income that you would otherwise be required to incur.
Contact us for assistance with any of these gifting strategies, including selecting which strategy best aligns your charitable and financial goals.
4. Capital Gains
Realizing investment losses and minimizing capital gains can help to reduce your tax liability. SageVest Wealth Management carefully evaluates capital gains and losses as part of our approach that always embeds tax sensitivity. Please apprise us and your accountant of any additional gains or losses generated by any personally managed accounts.
Important Note: If you sell an investment at a loss, you can’t re-purchase the same or any “substantially identical” investment for 30 days, or you will trigger a wash sale which forfeits the tax loss.
5. Roth IRA Conversions
If your income is negatively impacted or expected to be very low this year, a Roth IRA conversion might be a strategic tax plan to consider. Roth IRA conversions (where you convert traditional IRA assets into a Roth IRA) are taxed as ordinary income. However, if your income is low, you might be able to convert retirement assets with zero to very little tax impact.
Conversions are particularly attractive for individuals who might have negative income this year as a result of owning a business that might operate at a loss or having large itemized deductions that exceed your taxable income.
As a reminder, you can no longer recharacterize (or undo) Roth IRA conversion amounts, so it’s important to be confident about your decision before you act.
6. Coronavirus Related Retirement Account Distributions
Distributions from IRAs, 401(k)s and other retirement accounts trigger taxable income, typically including a 10% early withdrawal penalty if you’re under age 59 ½. However, the CARES Act waived the 10% penalty for aggregate distributions up to $100,000 taken out during calendar year 2020, if the distribution was COVID-19 related.
Distributions can be repaid over 3 years (effectively rolling it back into your plan). If not repaid, the tax impacts can be spread over 3 years. Careful tax planning is recommended if you might not be able to repay the amount to ensure you have adequate resources to pay the taxes in 2020, 2021 and 2022.
7. Appropriate Tax Payments
We always recommend conferring with your tax preparer before year-end to evaluate if your taxes might be over- or under-paid. If additional payments are anticipated, it’s best to know your financial standing to ensure you have adequate cash balances and to avoid any underpayment penalties. Conversely, if anticipated payments are no longer required, you might be able to skip or reduce your final estimated tax payment.
Careful tax planning is recommended for anyone who:
- Has experienced a change in income.
- Is filing under a new status (married, single, head of household).
- May have higher or lower itemized deductions.
- Traditionally makes estimated tax payments.
8. Medical Expenses
If you’ve had significant medical expenses, make sure you’re keeping all necessary records for possible itemized deduction benefits. Medical expenses only qualify as itemized deductions to the extent that they exceed 7.5% (in 2020) of your AGI.
9. Health Funding
Both Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) allow you to pay medical expenses with pre-tax dollars. However, while unused dollars in HSA accounts can accumulate and be invested, most FSAs operate on a “use it or lose it” basis.
- Check with your employer. Some FSAs allow a small carryover. If this isn’t available, you’ll need to use up any FSA balance before year-end.
- You may need to make contribution elections before year-end. These should be carefully considered relative to anticipated expenses.
10. College Funding
If college savings is an objective for you, your family or friends, consider making contributions to a college savings plan. College Section 529 plans offer tax-deferred savings (tax free when used for qualified education expenses), elevated annual gifting limits, and state tax deduction benefits in many states.
11. Business Planning
As a business owner, it’s important to maximize year-end tax planning opportunities, e.g., timing of large expenses or personal compensation considerations. You might also stand to benefit from the new 20% qualified business income deduction available to some business entities. SageVest is available to assist in a collaborative role, but we strongly recommend that you coordinate with your tax preparer regarding specific planning opportunities.
As a reminder, establishing a company or self-employed retirement plan before year-end can dramatically reduce your taxable income. Contact us for assistance.
12. Family Gifting
Effective gift planning can help you to support family and friends while also maximizing tax advantages for yourself.
- For 2020 and 2021, you can transfer up to $15,000 per person, per year, without triggering gift tax or taxable reporting requirements.
- Section 529 college savings plans offer tax-advantaged savings (see above).
- Larger gifting transfers require more advanced strategies and broader consideration. Please contact us to discuss.
Remember that your gifting considerations should always be planned, recognizing both your own financial security and broader giving objectives.
13. Trust Income & Distributions
If you’re the trustee or beneficiary of a trust, it’s wise to review net trust income and distribution elections before year-end. While some elections to beneficiaries can be deferred into the early part of the next calendar year, it’s best to be prepared, especially as trusts reach the top Federal tax bracket at a very low taxable income threshold of $12,950.
Please contact us to discuss any of these tax-planning or broader financial planning considerations.