Consider making a 2020 IRA contribution, and create or refresh your retirement plan Maximizing your allowable annual contribution may help keep you on track for retirement and possibly provide tax advantages.  Thursday, April 15, 2021, is the deadline to contribute for the 2020 tax year. It’s important to revisit your retirement plan every year to review your goals and objectives, understand how much you’ll need to accumulate, see where you currently stand and make any adjustments to help to stay on track. If you don’t have a retirement plan, now may be a good time to create one. 

Designate your beneficiaries Life events may affect your beneficiary designations. Review and update your beneficiaries to confirm that they’re consistent with your intentions.

Consider making a charitable contribution Donations of qualified appreciated stock may maximize the amount you give to your favorite causes.

Organize your tax documents. Many investment firms and banks provide access to your account and you can download and print tax documents such as Forms 1099-INT, 1099-DIV, 1099-B, 1099-R, and 5498.

Review your gains, losses, and expenses – and consider the potential tax consequences of income and distributions from your non-retirement account investments. Reviewing your 2020 non-retirement account transactions before year-end may help you identify opportunities to reduce your 2020 taxes. Also, certain distributions from these investments in non-retirement accounts may be taxed as ordinary income. At the same time, a portion of ordinary income distributions from real estate investment trusts (REITs) and income allocations from publicly traded partnerships may qualify for a tax deduction.

Review and rebalance your portfolio Rebalancing your portfolio regularly may assist you with staying aligned with your investment goals and objectives. If your circumstances have changed or you’ve experienced a life event this year, it’s always a good idea to review your savings goals and make sure your investments are still on track.

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1. Know if you will take the standard deduction

It’s important to know whether you expect to take the standard deduction before making decisions on year-end spending that would normally generate itemized deductions.  Tax reform doubled the standard deduction while repealing or limiting numerous itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions.

 If your itemized deductions are unlikely to total at least $12,200 (or $24,000 if married and filing jointly), you will not get any deduction for things like charitable gifts or elective health care procedures.

2. Maximize “above-the-line” deductions

Above-the-line deductions are especially valuable because so many taxpayers will no longer itemize deductions. They also reduce the taxpayer’s adjusted gross income, and AGI affects whether they’re eligible for many tax benefits.

Common above-the-line deductions include traditional individual retirement account and health savings account contributions, self-employment taxes, certain health insurance costs and any bank penalties you may have had to pay for early account withdrawals.

Note that tax reform repealed some popular above-the-line deductions, such as moving expenses (except for members of the military) and alimony payments (for divorces finalized after 2018).

3. Leverage retirement account tax savings

It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the Tax Code.  Contributions reduce taxable income at the time a taxpayer makes them, and they don’t pay taxes until the money is taken out at retirement.

The 2019 contribution limits are $19,000 for a 401(k) and $6,000 for an IRA (not including the $1,000 catch-up contributions for those 50 years old and older). Remember that 2019 contributions to an IRA can be made as late as April 15, 2020

4. Defer tax

Deferral remains a cornerstone of good tax planning.  Why pay tax today when you can put if off until tomorrow and enjoy the time value of money? Deferring tax is about accelerating deductions and postponing income.  You may be able to control the timing of items of income and expense.  Consider deferring bonuses, consulting income, or self-employment income.

On the deduction side, you may be able to accelerate charitable contributions (also known as “bunching”), state and local income taxes, interest payments and real estate taxes, but keep in mind the $10,000 cap on deducting tax, and whether or not you will be using the standard deduction. 

5. Plan for the new version of the “kiddie tax”

Tax reform repealed the old “kiddie tax,” which generally taxed the unearned income of children at parents’ marginal rates.  Now a child’s unearned income is taxed at trust and estate rates.  The change cuts both ways.  For some low- and middle-income families whose children receive unearned income like scholarships or military survival benefits, the trust and estate rates are much less favorable than their parents’ tax brackets.  For some high-income families, the ability to use the trust tax brackets may allow their children to enjoy more capital gains and qualified dividends in the zero and 15 percent brackets.

Consider whether it may benefit you to transfer assets earning investment income to children, but beware of the gift tax consequences and watch for changes in law.  The House has passed legislation restoring the old “kiddie tax” regime, and retroactive enactment is a possibility.

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