#taxsavings

Year-End Tax Planning

The window of opportunity for many tax-saving moves closes on December 31, so it is important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2020 tax year.

Timing is Everything

Consider any opportunities you have to defer income to 2021. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may allow you to postpone paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.

Similarly, consider ways to accelerate deductions into 2020. If you itemize deductions, you might accelerate some deductible expenses like medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or you might consider making next year’s charitable contribution this year instead.

Sometimes, however, it may make sense to take the opposite approach — accelerating income into 2020 and postponing deductible expenses to 2021. That might be the case, for example, if you can project that you’ll be in a higher tax bracket in 2021; paying taxes this year instead of next might be outweighed by the fact that the income would be taxed at a higher rate next year.

Factor in the AMT

Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to the AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT — essentially a separate, parallel income tax with its own rates and rules — effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2020, prepaying 2021 state and local taxes won’t help your 2020 tax situation, but could hurt your 2021 bottom line.

Special Concerns for Higher-Income Individuals

The top marginal tax rate (37%) applies if your taxable income exceeds $518,400 in 2020 ($622,050 if married filing jointly, $311,025 if married filing separately). Your long-term capital gains and qualifying dividends could be taxed at a maximum 20% tax rate if your taxable income exceeds $441,450 in 2020 ($496,600 if married filing jointly, $248,300 if married filing separately, $469,050 if head of household).

Additionally, a 3.8% net investment income tax (unearned income Medicare contribution tax) may apply to some or all of your net investment income if your modified AGI exceeds $200,000 ($250,000 if married filing jointly, $125,000 if married filing separately).

High-income individuals are subject to an additional 0.9% Medicare (hospital insurance) payroll tax on wages exceeding $200,000 ($250,000 if married filing jointly or $125,000 if married filing separately).

IRAs and Retirement Plans

Take full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds on a deductible (if you qualify) or pre-tax basis, reducing your 2020 taxable income. Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible or made with pre-tax dollars, so there’s no tax benefit for 2020, but qualified Roth distributions are completely free from federal income tax, which can make these retirement savings vehicles appealing.

For 2020, you can contribute up to $19,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to a traditional IRA or Roth IRA ($7,000 if you’re age 50 or older). The window to make 2020 contributions to an employer plan typically closes at the end of the year, while you generally have until the April tax return filing deadline to make 2020 IRA contributions.

Roth Conversions

Year-end is a good time to evaluate whether it makes sense to convert a tax-deferred savings vehicle like a traditional IRA or a 401(k) account to a Roth account. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are generally subject to federal income tax in the year that you make the conversion (except to the extent that the funds represent nondeductible after-tax contributions).

If a Roth conversion does make sense, you’ll want to give some thought to the timing of the conversion. For example, if you believe that you’ll be in a better tax situation this year than next (e.g., you would pay tax on the converted funds at a lower rate this year), you might think about acting now rather than waiting. Whether a Roth conversion is appropriate for you depends on many factors, including your current and projected future income tax rates.  We recommend you talk with your financial advisor and/or tax professional.

Changes to Note

Recent legislation has modified many provisions, generally for 2018 to 2025.

  • Personal exemptions were eliminated.
  • Standard deductions have been substantially increased to $12,400 in 2020 ($24,800 if married filing jointly, $18,650 if head of household).
  • The overall limitation on itemized deductions based on the amount of adjusted gross income (AGI) was eliminated.
  • The AGI threshold for deducting unreimbursed medical expenses is 7.5% in 2020, it returns to 10% in 2021.
  • The deduction for state and local taxes has been limited to $10,000 ($5,000 if married filing separately).
  • Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married filing separately) of qualifying mortgage debt. For mortgage debt incurred before December 16, 2017, the prior $1,000,000 ($500,000 for married filing separately) limit will continue to apply.
  • A deduction is no longer allowed for interest on home equity indebtedness. Home equity used to substantially improve your home is not treated as home equity indebtedness and can still qualify for the interest deduction.
  • The top percentage limit for deducting charitable contributions was increased from 60% of AGI to 100% of AGI for certain direct cash gifts to public charities for 2020 only.
  • The deduction for personal casualty and theft losses was eliminated, except for casualty losses attributable to a federally declared disaster.
  • Previously deductible miscellaneous expenses subject to the 2% floor, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Extended Provisions

A number of provisions are extended periodically. The following provisions have been extended through 2020 and are not available for 2021 unless extended by Congress.

  • Above-the-line deduction for qualified higher-education expenses
  • Ability to deduct qualified mortgage insurance premiums as deductible interest on Schedule A of IRS Form 1040
  • Ability to exclude from income amounts resulting from the forgiveness of debt on a qualified principal residence
  • Nonbusiness energy property credit, which allowed individuals to offset some of the cost of energy-efficient qualified home improvements (subject to a $500 lifetime cap)

Talk to a Professional

When it comes to year-end tax planning, there’s always a lot to think about. A tax professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine whether any year-end moves make sense for you.

In case you missed our Year-End Tax Planning webinar, check out the replay HERE. Many of these tax-saving moves are discussed in greater detail.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

Understanding Health Savings Accounts (HSAs)

Using a Health Savings Account (HSA) is a prudent financial decision that many Americans overlook or simply do not understand. One of their primary benefits is that contributed funds do not run out each year like a medical savings account. Instead, unused funds roll over each year and can be used for future medical expenses. This feature creates a unique planning opportunity to help cover future medical expenses, which is important since it is well documented that medical expenses are the largest expense for many in retirement. Furthermore, a retiree can use a health savings account even when on Medicare to cover medical expenses.

Here are some important facts to keep in mind when it comes to an HSA:

  • They must be under a high deductible health plan.
  • Funds can be used for current or future medical expenses.
  • Contribution limits are set by the IRS ($3,550 if single or $7,100 for family).
  • You control the assets and they are portable if you retire or switch employers.
  • Contributions are 100% tax-deductible and withdrawals are tax-free for qualified medical expenses.

Who qualifies for an HSA?

To qualify, you must be enrolled in a high deductible plan that is compatible with an HSA and you can’t be enrolled in another health plan or in Medicare (funds acquired through an HSA prior to using Medicare can be used, however).

If you have any questions, your best option is to simply inquire with your employer and see if you qualify for an HSA.

What are the tax implications of an HSA?

Contributions up to IRS limits of $3,550 single or $7,100 family are 100% tax-deductible. The money will grow tax-deferred and is tax-free if used to pay qualified medical expenses.

Other factors to consider

Assets in the health savings account can be invested in ETFs, mutual funds, or held in cash. A person can do a partial rollover from an IRA into an HSA (within IRS limits) as well to help fund the HSA. The amount you contribute is an important consideration and it is best to consult with a Financial Advisor to best understand how you can potentially benefit from an HSA and determine what amount is most beneficial for you to contribute.