Year End Financial Strategies, 2020

A pandemic, a hotly contested Presidential election, and a mass migration to remote learning and remote working,  2020 was a very unique year. As we approach year end, there is a complex web of things to take into consideration for tax planning purposes. The Cares Act provides some tax reduction opportunities.  The presumptive change in regime to a Biden administration also suggests taking into consideration the potential Tax changes that he has advocated in his campaign. 

Shortly before the election, the Tax Foundation released an analysis of Biden’s Tax plan. It  assessed that by 2030 the plan would lead to approximately 7.7% less after-tax income for the top 1% of taxpayers and about a 1.9% decline in after-tax income for ALL taxpayers on average. Below I will suggest some tax reduction ideas to consider. At Personal Asset Strategies (PAS) we advise our clients about year-end planning strategies and then administrate the agreed upon strategies, which saves them time and often money. 

Major Points of the Biden Tax Plan: 

Under Biden’s plan there will be a 12.4%  payroll tax (split evenly between employers and employees) imposed on those earning over $400,000.There will be an increase in the income Tax rate for those earning above $400,000 to 39.6 percent from the current top tax rate of 37 percent. 

Long term capital gains and qualified dividends will be taxed at the ordinary tax rate of 39.4% on income over $1,000,000.

Biden is proposing two major tax increases on accumulated wealth. First, he would tax unrealized capital gains at death for taxpayers with incomes above $400,000 at approximately 23% for those earning under $1,000,000 and more for those earning over. This is before the assets might be subject to the estate tax. And increasing the estate tax, with a top rate 45% (compared to 40 percent today), and reducing the exemption level for single taxpayers to $3.5 million (as opposed to $11.58 million today)

Itemized deductions for those earning over $400,000 will be capped at 28% of the item’s value.

Temporarily provides increases in the child tax credit with additional credit for children under 6 and The Child and Dependent Care Tax Credit from $3000 to $8000 ($16,000 for multiple dependents) 

Expands the Earned income tax credit (EITC) for childless workers and those over 65 and  provides renewable energy credits.

Reestablishes the First Time home buyer credit providing a tax credit of up to $15,000, originally used during the great depression.

Some year-end strategies for 2020  to consider: 

Charitable Contributions: The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the standard deduction while also reducing the categories and amounts of deductions. This reduced the number of taxpayers claiming itemized deductions. The Cares Act (2020) created an above the line deduction of up to $300 for charitable cash contributions for ALL taxpayers. So consider making a charitable contribution before the end of the year, even if you don’t itemize. 

Tax Treatment of your Stimulus Check: The stimulus check (based on 2018/2019 income) is being considered an advance on tax credits for 2020.  There will be no tax due on that payment nor will it reduce any refund you may be entitled to.  By applying a credit, you’re just lowering the amount of taxes you owe. The amount you paid in taxes throughout the year hasn’t changed; the IRS will still need to pay you your refund. 

Distributions or Loans from a retirement account:  The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (i.e.401(k) and 403(b) plans, and IRAs) to those impacted by the Corona Virus epidemic. It also increases the limit on the amount a qualified individual may borrow from an eligible retirement plan. If you take a distribution, the penalty for early distribution will be waived and it will be includable as income that can be stretched out over three years (equally). Alternatively it can be treated as a loan if repaid with-in three years. 

Deferral Of Income: If you are on the cusp of having income of over 400k annually I recommend not deferring any income until next year. Under a Biden administration there are proposals for major tax increases on those who earn over $400,000. That is even more important where you are on the cusp of earning $1,000,000. Biden proposes significant changes in how Capital gains are taxed for tax-payers earning over $1,000,000. It is unclear in Biden’s plan whether there will be capital gains changes for those earning less than that $1,000,000 mark. 

Increase withholding to cover a shortfall in estimated taxes: A larger estimated tax payment at the end of the year can still expose you to penalties for underpayments in previous quarters, but withholding is considered to have been paid ratably throughout the year, so increasing it for year-end wages can save you in penalties. Particularly important this year since a lot of business had little income in the first and second quarter but hopefully caught up by year end. 

Low Interest Rates & Generous Exemptions: Take advantage of these opportunities before year end. Take advantage of LOW interests rates and high estate and gift tax exemptions to purchase assets and transfer assets to younger generations before year end. 

Defer Investment Losses: If you are concerned about the Biden increase in capital gains tax consider deferring taking investment losses until 2021. That will enable you to offset potential gains in 2021, where gains may be more expensive taxwise. 

Make Contributions to IRAs, and Health Savings Plans: For 2020, you can contribute as much as $6,000 to an IRA, or $7,000 if you’re aged 50 and older, though  you must have enough earned income to cover the contribution. Contributions  to an HSA (Health Savings Account) are tax-deductible, and the account’s earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses.

Consider NOT making mandatory minimum  withdrawals from retirement accounts: The CARES act temporarily waives required minimum distributions (RMDs) for all types of retirement plans (including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans) for calendar year 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.

At PAS we work with our clients and the other professionals they work with including CPAs and attorneys, to make sure that recommended tax strategies are properly executed. Sometimes this involved liquidating investments, retitling assets, creating trusts, etc. We make sure that the administrative work is done in a timely fashion to ensure that client’s tax strategies are implemented.

I hope that this article helped you to organize your end of year financial strategy. While I strived to provide a great deal of information as a resource this list is not comprehensive. Only rely on the advice of the professionals that you work with directly, who are familiar with your unique situation. 

If I can be of any assistance please contact me or my office to schedule a complimentary consultation.

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Amanda Jones

Amanda Jones, Esq. is an Attorney and Financial Advisor at Personal Asset Strategies, Inc. serving clients in Westbury, NY, Livingston, NJ and Boca Raton, FL. Please contact Amanda if you have any personal finance questions or questions about your investments. (516)248-8811.