Year-End Tax Planning 2020: 6 Tips to Maximize Your Savings


The best way to maximize your tax savings is to get started well before Tax Day comes. Whether you’re in a high tax bracket or a lower one, you can benefit from getting a head start on collecting documents, assessing your financial situation, and making a plan for tax season. Let’s take a look at six year-end tax planning tips for 2020 that will help you start 2021 on the right foot.

1. Gather All Your Paperwork

Come tax time, many people will scramble to gather all the essential documents to file their taxes by the April 15 deadline. If you want to avoid that next year—and help out your busy tax preparer—make it a priority now to gather all the important paperwork you have. You can also designate a place to put any incoming tax-related documents (like your 2020 W-2s).

Documents you may need include:

  • Your previous year’s tax returns
  • Medical expense records
  • Charitable donation receipts
  • Retirement plan and investment account statements
  • Tuition records
  • W-2s
  • 1099 forms

If you start collecting these documents ahead of time, it gives you advance notice if you find that something is missing or needs to be corrected. Designating a “tax folder” also gives you a place to put your W-2 when your boss sends them out in January.

2. Flexible Savings Account: Use It or Lose It

As the year comes to a close, it’s critical to check the balance of your flexible savings account (FSA) and reimburse yourself for any qualified medical expenses you incurred between January 1 and December 31, 2020.

If you don’t use the funds in your health care FSA, much or all of the money could be forfeit. Check with your Human Resources department to determine if your FSA has a provision for carrying over funds—some accounts do. Some also allow a grace period—again, check with your employer.

Try using one of these strategies to spend down your FSA balance:

  • Stock up on first-aid supplies. FSAs reimburse you for basic health essentials that you may be running low on, such as diabetes supplies, Band-Aids, pain relievers, and even sunscreen.
  • Schedule an eye exam. And while you’re there, buy new glasses or contacts.
  • Get acupuncture or chiropractic treatment. Some flexible spending accounts cover less traditional therapies—though you may need to get a letter of medical necessity first.
  • Think about renovations to your home or car for accessibility. If you are disabled or have trouble getting around, check to see if your FSA will reimburse home or vehicle accessibility enhancements, like installing a ramp and handrails.
  • Get a dental procedure you’ve been putting off. If you’ve been avoiding a crown or bonding replacement, now’s the time to get it.

3. Should You Itemize or Take the Standard Deduction?

Assess whether you want to itemize your deductions or take the standard deduction on 2020’s tax return. Taking the standard deduction is the simplest way to go, but you may want to itemize if your tax deductions will total more than $12,400 for individuals, $18,650 for heads of household, or $24,800 for married filing jointly.

Even if you plan to take the standard deduction this year, the CARES Act authorized an above-the-line deduction of up to $300 in charitable contributions from taxpayers who aren’t itemizing.

If you’re on the line between the standard and itemized deduction, you can take steps to make itemizing worth your while:

  • Give to your favorite nonprofits.
  • Make early estimated state income tax payments that are due next year.
  • Pay medical bills that may not be due until early 2021.
  • Pay your 2021 property taxes early.

4. Do You Need to Accelerate or Defer Income?

Depending on your tax bracket, you may want to accelerate or defer your income. If you expect that your tax bracket in 2021 will be lower than it is for 2020, it may be a good idea to defer income into 2021 while accelerating deductions:

  • Pay medical bills due in January.
  • Prepay deductible interest.
  • Buy office supplies or business equipment.

On the other hand, if you anticipate a higher tax bracket next year, consider getting as much income as possible to be taxed in this year’s lower bracket. Try deferring deductions or accelerating income (without pushing yourself into the next tax bracket):

  • Wait to pay deductible expenses until January.
  • Ask for higher up-front payments for work due early next year.
  • Follow up with any clients who are late to pay an invoice.

5. Top Off Your Retirement Accounts

If you are financially able, consider contributing the maximum to your tax-advantaged retirement accounts since your contributions are deductible for the year you make them. The more you pay now, the bigger your tax break will be for 2020.

  • The maximum 401(k) contribution for 2020 is $19,500, plus a $6,500 catchup contribution if you are age 50 or older. You will need to contribute by December 31, 2020, to apply the amount to your 2020 tax return.
  • The maximum IRA contribution for 2020 is $6,000 for individuals, or $7,000 for those age 50 or older. You have until April 15, 2021, to contribute to your IRA—just make sure you designate the money for your 2020 tax return.

Harvest Your Portfolio Losses

If 2020 handed you both losing and winning investments, use the losers to offset the winners’ capital gains. You can also apply this strategy of tax-loss harvesting to offset up to $3,000 in ordinary taxable income, plus carry forward your unused balance into future years.

This strategy applies to taxable investment plans, like your brokerage account, rather than your tax-deferred traditional IRA or 401(k). You should also be aware of the wash-sale rule. This rule bars you from selling an investment at a loss and buying an identical or substantially identical one within 30 days before or after the sale.

If you are unsure whether tax-loss harvesting is right for you, consider talking with a financial advisor, like our Richmond financial planning firm, that can advise you based on your overall financial situation and goals.

Start Your Tax Planning Now

This time of year gets busy, and even with the COVID-19 pandemic putting a dint in how we conduct our lives, you may still get caught up in a whirlwind of holiday activities. But set some time aside to complete this important end-of-year tax planning.

The end of the year is an ideal time to make sure your ducks are in a row. Gather essential tax documents, use up your FSA funds, make a plan for deductible expenses, confirm your 2020 tax bracket, contribute the maximum to your retirement plan, and harvest any investment losses.

As the year winds down, it is also an opportune moment to connect with your tax professional and financial advisor to make a plan for next year. By getting ahead of the tax season rush, your tax preparer will have more time to focus on your individual needs. And you and your financial advisor can discuss changes to your life that may require updates to your tax or financial strategies.

 

The information contained in this presentation does not purport to be a complete description and is intended for informational purposes only. Any opinions are those of the content creator and not necessarily those of the named advisor(s) or JWCA. This information is not intended as a solicitation or an offer to buy or sell any security or investment product. Information is solely intended for recipients in jurisdictions where the named advisor(s) are licensed to engage the investing public. Investments and strategies mentioned may not be suitable for all investors. The S&P 500 and other such indices are unmanaged, do not incur fees or expense, cannot be invested into directly and individual investor’s results will vary. Past performance is no guarantee of future results. As with all investments, various risks may exist and JWCA recommends you consult with your financial advisor prior to making any investment decisions. Advisory Services offered through J. W. Cole Advisors, Inc (JWCA). Financial Dynamics & Assoc. Inc and JWCA are unaffiliated entities.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

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