It’s December and the madness of 2020 is almost over. Are you ready to put this crazy year behind us? As we move closer to the end of an unprecedented time in our generation, filled with uncertainty and a roller coaster of events, it’s time to get our financial affairs in order and I know just where you should start.
If you’re like most families the strain of COVID19, the debacle of unemployment, business closures, and the newly announced lockdown is putting a damper on the holidays. For those of us who are still committed to pandemic precautions, it’s going to be a different, and admittedly, less enthralling season.
However, one thing is the same as last December. We need to make some tax moves before January 1st. If you didn’t take advantage of the free tax strategy session, there is still time to organize yourself. Check out my guideline to fiscal fitness.
checkers, not chess
Just like last December, most tax movements require some research and financial calculations. All of these calculated measures are required to determine what the impact of certain tax movements will be and whether you even need to include them in your year-end assessment. Others require you to break out an ouija board and channel an ancestor to make some political predictions. Either way, it’s time to adult!
Did you expect anything less in this chaotic COVID-19 year? As we approach Jumaji Level 36, I’ll break down the moves you need to make to get ahead of the pack.
1. Check that w4 twice!
Adjust it if necessary. If you don’t pay enough taxes all year round, either through withholding tax or estimated taxes (more on that in a minute), you could face a surprisingly higher tax burden next year. The easiest way to avoid this is to adjust your withholding tax. Now.
Yes, you probably don’t have many payment periods to spread these tax payments over. However, increasing the amount by at least a few bucks can help reduce any tax shortfalls from April 15, 2021. My online withholding tax calculator can help.
You should also try to optimize your withholding tax if you – and your spouse too if you are filing a return together – have made some side gigs to supplement your salary (or salaries). It is true that estimated tax payments can help to make up for the deficit, especially when it comes to untaxed additional income. The final payment for 1040-ES for the final quarter of 2020 is due on January 15, 2021, and will help to reduce your overall tax bill.
However, if you forgot to account for the estimated tax and you (or your jointly registered husband or wife) are also employed, withholding is an easy way to cover those additional tax amounts.
2. calculate taxes on all income (even the hustle)
If your only income this year is from wages, you can jump to # 3. However, if you had to hustle and gig your way through 2020, you’ll want to tap into those funds. The reason? The current individual tax rates created by the Tax Reduction and Jobs Act (TCJA).
There are seven income brackets, the current rates are historically low compared to the last few decades. That’s slated to change by 2025 and we want to take advantage of every savings we can. However, if you have a higher income and your ancestor says that President-Elect Joe Biden may be inclined to raise your taxes sooner, you may want to withdraw a chunk of cash from your retirement accounts while the tax liabilities are lower this year and the penalty has been waived.
If you’re a payroll employee, receive bonus payments, plan to withdraw stock options, or receive some other form of deferred compensation this month instead of 2021, your tax charge will be calculated under the existing TCJA rates, and that’s a win. I suggest doubling down and investing the savings.
Those of us displaced from work, keep in mind that any unemployment benefits you will receive this year are taxable as unearned income. You need to make sure that you have paid estimated taxes or, as mentioned in # 2, you can increase your (or your spouse’s) withholding tax ASAP to offset taxes due and possible penalties.
3. Add to your nest egg.
It’s never too early or too late to start thinking about how you’re going to pay for your retirement. Now is the time to sacrifice to make future Decembers more enjoyable by adding an account to your retirement portfolio, be it an IRA or self-employed retirement plan. Keep in mind that you’re building your legacy. Nobody said it was going to be super easy, but I’ll give you the road map.
It’s too late to add to a 401 (k) or similar workplace sponsored fund, but you can still reach out to your HR department and get familiar with the products they offer and how they can benefit you and your family.
The IRA registration deadline to deposit funds into these accounts is next April. The sooner you contribute, the sooner the power of growth begins to work for you. Putting money in your retirement funds can qualify you for the Retirement Savers Credit. A traditional IRA can also be deductible.
4. Turn your traditional IRA into a Roth.
I’m about to get technical. Stay with me. Traditional IRA deductions are attractive because of the tax advantages. Most retirement accounts are bankrolled with pretax dollars, so there is no deduction applied with a qualified withdrawal. That’s right! You won’t owe taxes when taking Roth distributions – at your own pace post-retirement; there is no minimum distribution (also known as RMD) required for these accounts – in your golden years. So even though you literally can’t take it with you, you aren’t obligated to pull from the fund either. It’s “trust” worthly. Pun intended.
If that’s an appealing retirement prospect, you can convert your taxable traditional IRA to a tax-free Roth. The only downside is that you owe tax on the traditional account’s deferred tax income. However, with the current relatively low TCJA tax rates, you pay less for the converted amount. Now would be the time to flip it.
Before you jump to call your broker, it’s important that we don’t take financial steps based solely on the tax implications. I caution my followers to run the numbers and make sure you can cover the exchange taxes. Having to use money from your IRA to pay the tax bill will reduce the conversion benefits and might defeat the purpose of converting.
And remember, you don’t have to convert your entire traditional IRA. You can do a partial conversion. Determine how much of the related tax you will have to pay that year before you take the leap.
5. Bundle your deductions
Each tax year you choose whether to claim the standard or itemized deduction. With the Standard Amounts nearly doubled by the Tax Cut and Employment Act, the trend is definitely towards the Standard Amount, which for 2020 this year is $ 12,400 for single registrants, $ 18,650 for heads of household, and $ 24,800 for jointly submitted couples.
However, if you find that claiming one over the other gives a larger deduction, roll with it! One way to increase your Schedule A entitlement is to bundle your tax-deductible expenses. Bundling is simply the consolidation of the deductible costs into one tax year. If you’re near the $ 10,000 cap on state and local taxes, there’s not much you can do here. However, if you have space to work, be sure to pay at least some 2020 property taxes this month to get the most out of them.
Medical expenses are also capped, which will stay at 7.5 percent of your Adjusted Gross Income (AGI) for that tax year. Any costs to doctors and dentists (and more) in excess of this amount can be claimed in Appendix A. According to the current tax law, this could be the last year in which the limit of 7.5 percent applies. It is set to increase to 10 percent in 2021. However, it’s suspected that Congress will hold off on the increase when it finally introduces legislation to extend expiring tax breaks. Fingers crossed.
The mortgage interest deduction is still allowed and if you make your January home loan payment in January, you can get the additional interest that year.
The same applies to charitable donations, which are still deductible and not limited at all. If you are on the verge of having more individual claims than your standard deductible amounts, consider making the 2021 charitable contributions now. It might be enough to push you over the limit so that you don’t lose the value of other itemized claims.
6. Raid the FSA/HSA
Your deductible medical expenses may not be as high as you have another medical tax break, a Flexible Expense Account (FSA). This workplace benefit allows you to set aside US dollars before taxes to pay medical expenses out of your own pocket.
If you still have funds in your medical FSA, look for ways to spend that money this month.
In some workplaces, medical FSA owners have a grace period until March 15th of next year to spend that money. Others let you roll up to $ 500. If you’re given either option, there’s no such year-end rush.
However, if you don’t have a grace period, you will have to spend your FSA funds by the end of the performance year, which is December 31 for most companies, or you will lose the money.
Now check your FSA balance and decide how to spend any excess money. There are many and some unusual ways to spend FSA money, including COVID-related options.
7. Check Portfolio for tax measures
If you’ve got stocks, your blood pressure is likely sky-high. Whether you were taking advantage of splits and options or losing your shirt you’ve likely been holding your breath year-round. The market has been up and down and you, like economists, are trying to figure out if it will finally take that long-feared, long-awaited nosedive.
If your patience has paid off in an increase in the value of your inventory, you may now want to take what is known in the tax world as the harvest of tax profits. You will get a high rating and no longer have to worry about when the market will fall.
It could also be a tax plus. As long as you’ve held the assets for more than a year, you’ll pay the usually lower tax rate on capital gains. The maximum capital gain rate is 20 percent, but it is lower, 15 percent, and may not be taxable at all, depending on your gross adjusted income.
It’s also forecast time again, ask your ancestor what in the cards. The new administration has proposed increasing tax rates on investment income. For some very high-income investors and lucky day traders, the maximum rate could be 37 percent (or more). That’s almost double the current capital gains tax rate of 20 percent! If you’re in this scenario, then you know what could happen, it may be a good time to cash out on those lower tax rates.
Reducing your holdings may also be worthwhile if you are on the other end of the investment spectrum. Selling assets that, to be honest, suck, leads to tax losses. Use them to offset your profits and reduce or possibly alleviate all of your investment tax liability.
If you suffer additional losses from harvesting your tax losses after counteracting your profits, you can use up to $ 3,000 of that amount to reduce your tidy income. Excess losses in excess of $ 3,000 can be carried forward.
The elephant in the room:
First, when you sell assets make sure that your profits are long-term. When you sell assets that you have owned for a year less than that is known as short-term holdings, you will owe taxes at your regular income tax rate unless you have short-term losses to offset them.
Second, when you have six grand or more losses, get a new financial advisor now!
8. Claims for damages
Mother Nature has taken the 2020 Annus Horribilis setting to heart. Between the forest fires here in CA, a surprise derecho, and hyperactive hurricane season, people across the country suffered unfathomable property damage and worse.
2020 hurricane trails
The only light at the end of the tunnel for millions of Americans is that many of them had extra time to file their 2019 tax returns, which was extended through October 15.
December 15 is the new tax deadline for forest fire victims in Iowa Derecho and California. December 31st is a new tax deadline for Louisiana taxpayers affected by Hurricane Laura.
Even later deadlines: For other disasters later in 2020, taxpayers who received an extension of tax collection for 2019 now have deadlines in early 2021. January 15 is the deadline for Oregon wildfire victims, Alabama victims of Hurricane Sally, and those who were exposed to forest fires in California in September. Hurricane Delta victims in Louisiana have until February 16 to file their 2019 extended tax returns.
Taxpayers facing damage repairs due to a natural disaster must also decide whether to make these claims (using Form 4684) on their tax return for the previous year or wait and file them in the actual year the disaster occurred. This is where some of these calculations come into play. You’ll need to compare to see which tax year gives you the best result and possibly a larger tax refund that arrives sooner to help rebuild. Need help doing the math? Schedule a consultation. I am here to help!
9. Give it all away, kind of
The coronavirus pandemic was devastating for our country. If we’re able to afford it on Giving Tuesday 2020 or any other day in December, consider helping people who are less well off by donating to a nonprofit. We recommend the Salvation Army.
Your charity support could also pay off as a tax break on your 2020 return, provided you give the gift by December 31st.
This year you also have a wide variety of tax philanthropic options. You can give up to $ 300 and claim those donations right on your 1040. Or you can make more donations, including donations in kind, and list those donations in Appendix A. Regardless of how you choose to claim your charity tax deduction, follow these IRS rules instructions.
10. Evaluate your estate plan.
Giving to your family members can also help lower taxes. If you have a large estate that may be subject to federal estate and gift taxes it’s time to open your wallet.
Follow me here, if this applies it can be a drastic undertaking. The TCJA has dramatically increased the number of assets protected from Uncle Sam’s tax collector if the owner dies.
In 2020, the lifetime gift and estate tax exemption are $ 11.58 million per person! Now, realistically most of us don’t dabble in this kind of tax bracket, but in essence, an estate made by a couple filed together is tax-protected as long as it does not exceed $ 23.16 million in worth! If that knowledge alone doesn’t motivate you to break generational curses and get the bag, I don’t know what will!
In 2021, inflation is rising and the exclusion amounts are $ 11.7 million per person or $ 23.4 million per couple. That more than most of us will make in a lifetime but you get the idea. Get to earning so you can get to giving to your heirs!
I should highlight that the incoming President-Elect Joe Biden and many of his fellow Democrats have expressed an interest in reducing this tax benefit, so if it applies, jump on it like the Sugar Hill Gang. Early proposals include inheritance tax exemptions of $ 3.5 million, or $ 7 million for married couples, you see where I’m going here?
Regardless of the tax threshold, you can cut that tax amount by giving away assets while you’re still there to say thank you in person. For 2020 (and 2021 too), you can give up to $ 15,000 to anyone you want, your family, a long time friend, or the tax lady whose work you enjoy reading about. This amazing gifting option limit applies per taxpayer. For married couples, this means that each spouse will receive the $ 15,000 gift. Now the real question is how well do you like your daughter’s husband?
These gifts help reduce the value of your estate to reduce the amount that is subject to the possible 40 percent estate tax that Biden has suggested at 45 percent. There is also good news for the recipients. You don’t have to pay a penny for the gifts! Now is the time to find all your faux cousins!
The gifts aren’t limited to dollars either. You can give assets valued up to the limit, such as real estate and family heirlooms, provided they are valued up to or below the limit without incurring a gift tax liability. So hand over the Honda and keep the Benz.
And here’s a tip for grandparents with some cash to spare. Rather than gifting $ 15,000 worth of your grandchild directly to your grandchild, you can pay a student’s tuition fees directly to the school instead of counting them as gifts under the gift exclusion rule. School can be ANY educational institution, not just college. That frees up more to give against your estate. Build that entrepreneurial spirit and/or fund trade school opportunities.
Even if your gifts consume all of your liberations, that isn’t necessarily a bad thing. Your loved ones receive your gifts and family heirlooms tax-free early on so that they (together with you) can enjoy them longer sans Uncle Sam’s hand in their pocket. And with financial gifts or assets, they benefit from the gifts’ potential growth.
I know, this list is longer than your kid’s wish list for Black Santa. My bad yall, but keep you up to date with the knowledge needed to navigate these financial streets is a must. Remember ALL of these recommendations must be completed by December 31, 2020, in order to take advantage of the tax breaks and the current tax reduction.
They could bring you some nice tax savings and give you yet another reason to celebrate the end of this extraordinarily difficult year.