As we welcome Fall and things start to slow down, it’s a great time to start thinking about your year-end tax planning. Taxes can be a very confusing thing, especially if you have experienced changes this year. That’s why we created this year-end tax planning guide for our clients.
If you don’t expect to change tax brackets next year, deferred income might be the way to go. Deferring income into the following year and accelerating expenses into the current tax year is a tried-and-true technique. Self-employed individuals and independent contractors may opt to hold off on sending invoices until late December to push the associated income into 2021.
However, regardless of employment status, all taxpayers can defer income by taking capital gains after January 1. It’s important to remember that waiting to sell increases the risk that your investment’s value will decrease. Furthermore, taxpayers who are eligible for the QBI (qualified business income) deduction could end up reducing the size of that deduction if they decrease their income. For this reason, you may opt to maximize QBI deduction, which is scheduled to end after 2025.
The TCJA (Tax Cuts and Jobs Act) that boosted standard deductions in 2019 also limited or eliminated, several of the popular itemized deductions. This may make it more challenging for you to claim more in itemized deductions than the standard deduction. Bunching those deductions can make it easier. Bunching, or timing, means delaying or accelerating deduction into a tax year to exceed the standard deduction and claim itemized deductions.
By bunching in one year and taking the standard deduction the next, the overall deduction could be increased for the time. For example, you could bunch your charitable contributions if it means getting a tax break for one tax year. If you typically donate at the end of the year, you can bunch donations in alternative years, donating in January and December of 2021 and January and December of 2023. Bunching can be used in several ways, including for Donor-Advised Funds, Qualified Medical Expenses, and Property Tax Payments. Your financial advisor can go over the requirements and help you decide which plans will work best for you.
[Related: Changes to IRA Stretch Distribution Rules]
There were several changes to itemized deduction under the TCJA. One was the reduction of the state and local tax deduction to $10,000 and removing miscellaneous itemized deductions. However, the charitable deduction is still available, with new enhancements. Gifts or donations of cash to a public charity are deductible up to 60% of your adjusted gross income.
You may also donate property to charitable organizations. When using the fair market value of the property, the maximum amount of the deduction is 30% of your Adjusted Gross Income. If you choose to utilize the cost or basis of the donated property, the maximum deduction increases to 50% of your AGI. The same is true of donations of appreciated property to private operating foundations as well.
When considering the amount of your charitable donation, you must remember that if you receive any benefit from making the donation, you must reduce the amount of your deduction by the fair market value of goods and services received. Certain automobile and travel expenses and other non-reimbursed expenses on behalf of certain charities may also be deductible. Your financial advisor can offer more insight.
Loss Harvesting Against Capital Gains
2020 has been quite the year. Your portfolio may be ripe for loss harvesting. This means selling underperforming investments before year-end to realize losses that can be used to offset taxable gains you also realized this year. Generally, if your losses exceed your gains, you can apply up to $3,000 of the excess to offset ordinary income. Any unused losses can be carried forward indefinitely throughout your lifetime, providing further opportunity to use them in subsequent years.
Year-End Tax Planning: Maximizing Retirement Contributions
You should always consider marking the maximum allowable contributions for the year to your IRAs, 401(k) plans, deferred annuities, and other tax-advantaged retirement accounts. Your financial advisor can help you create a plan to achieve this goal and explain the benefits of doing so.
Qualified Opportunity Zone Investments
TCJA added a new way of deferring tax on capital gains for up to seven years. This is done by investing in a Qualified Opportunity Zone. You must invest the gain from the sale of a capital asset into an Opportunity Zone within six months of the date of sale. Investing in an Opportunity Zone provides several tax benefits, including:
- Tax on the initial capital gain is deferred
- If proceeds are invested in the fund for five years, 10% of the initial gain is not taxed
- If proceeds remain for an additional two years, another 5% of the gain is not taxed
- If you hold the Opportunity Zone investment for a full 10 years, any appreciation on the original investment is exempt from tax.
[Related: Capital Preservation}
Selling Capital Assets
Currently, there are preferential tax rates applied to gains on the sale of capital assets. Net long-term capital gains are subject to tax depending on your filing status and taxable income. Net short-term gains are taxed as ordinary income. Furthermore, a net investment income tax is also applied to gains on the sale of capital assets. It is prudent to speak to your advisor about how you could take advantage of these lower rates and decide if selling your capital assets would benefit you.
Year-End Tax Planning: Schedule a Consultation With One Of Our Experienced Financial Advisors
We have experienced things in 2020 that most people thought would never happen. This has left a lot of people financially unstable, and others uncertain of what to do with their investments and profits. We recommend speaking to a professional to go over your unique needs and decide on a plan of action for your end of year taxes. To get started, contact Argent Bridge Advisors online or call (833) 568-4900 today to meet with one of our experienced financial advisors.