• Steve Coker, CFP

Getting started on year-end tax planning


It doesn’t seem like tax season. The election just finished, your tax return is not due for months, and your CPA is just getting back from vacation. Moreover, there is still a tremendous amount of uncertainty surrounding tax policy for 2021. And yet, fall is one of the best times to consider your tax situation. By April it is often too late to impact your income and deductions and your CPA is relegated to ‘recording’ what happened. By taking steps now, you can take advantage of many of the best ways to save. Here are some ideas you should consider now so that you can save come April.


What should you do if your 2020 income is lower than normal?


Many employees and business have struggled this year during the Covid shutdowns. Did you get laid-off, have reduced business income, or retire to a much lower income this year? Make the most of your lower tax bracket by considering the following:


1. Convert some of your traditional IRA to a ROTH IRA. Converting part of your traditional IRA to a ROTH IRA requires that you pay taxes on the converted amount. What better time to make the conversion than in a year with lower income? Paying a small amount of tax now can save you thousands in the long run.

2. Harvest capital gains. Many investors have unrealized gains from the bull market of the last few years. Harvesting these capital gains can make sense in many situations but can be especially helpful when your income is lower than normal. In fact, the federal capital gains rate is 0% for those in the 10% and 12% brackets (up to $80,000 in taxable income for 2020 for a married filing jointly taxpayer). Having a low-income year is a significant opportunity that should not be missed.

What should you do if your 2020 income is higher than normal?


Did you get a big bonus, receive significant severance pay? Is your business doing better this year than in the past? Here are some ideas for reducing your taxable income and advancing deductions:


1. Maximize your 401k deductions. This is one of the first and best ways to reduce taxable income. The maximum contribution for 2015 is $19,500 for those under 50 and $26,000 for those 50 and older. Increasing those contributions for the remainder of the year can significantly reduce your tax due.

2. Maximize your charitable contributions. If you are charitable minded then one of the best ways to reduce taxes is to give, especially appreciated stock or property. Don’t know who to give to? You can contribute to a Donor Advised Fund, get the tax deduction this year, and then select the final charities in the years to come. This strategy is especially effective when you have a one-time spike in income.

We will continue to keep our pulse on tax policy going forward as changes are coming. Nevertheless, we cannot always wait for a final answer before taking basic steps to manage our tax situation. If you would like to talk about these ideas or dig deeper into your situation, please do not hesitate to call.

DISCLOSURE Information on this website and others should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss. The materials and content herein are not a substitute for obtaining professional tax, personal financial planning, or other relevant financial advice from a qualified person or firm. For full disclosure click on the disclosure link at the bottom.

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