As the clock runs out on the 2020 tax year, there is still time for taxpayers to execute some wise tax planning. A few planning steps can reduce the current year’s tax liability as well as defer taxes to future years making funds available now when the extra cash can do the most good.
Tip 1: Take Advantage of This Tax Break for 2020
Charitable donations for 2020 for qualifying organizations are 100% deductible. This is in contrast to previous years where charitable gifts were limited by a percentage of the donors adjusted gross income.
Tip 2: Think About a Roth IRA Conversion
Traditional IRAs are upfront tax breaks, but offer less flexibility than the after-tax benefits of a Roth IRA.
Converting a traditional IRA results in a tax liability during the year of conversion. However, if you expect the value of your IRA to grow over time, you can convert it to a Roth plan now so there will be no tax impact when you begin withdrawing money later. Beside those considerations, there is no guarantee that traditional IRAs will survive the upcoming Biden administrations plans for replacing traditional IRA tax deductions with tax credits.
Tip 3: Make Advance Medical Expense Payments
The Further Consolidated Appropriations Act retained the 7.5% AGI threshold for 2019 and 2020. After December 31, 2020, the threshold will revert to 10%. So, bunching unreimbursed medical expenses into 2020, especially if those expenses are significant, could result in a tax savings. Those expenses could be health and dental insurance premiums. payments for private nursing home care for a parent (not a dependent), etc.
Tip 4: Protect Your Assets from Estate Taxes
Family members suffering financial hardship because of the COVID-19 pandemic can benefit from a tax free $15,000 gift from your estate. The amount can double to $30,000 for married couples who want to be especially generous.
Tip 5: Prepay 2021 Real Estate Taxes
It used to be that prepaying real estate taxes made the taxpayer subject to the alternative minimum taxes. Now there is a generous AMT exemption, and the new $10,000 cap on deducting state and local taxes overcomes the AMT. Prepaying real estate taxes in 2020 for taxes due before the end of 2020 can give the taxpayer an accelerated deduction.
Keep an Eye on Who will Run the Senate in 2021
Finally, until the results of the Georgia senate elections are in, it is uncertain whether the ambitious Biden tax plan can survive a U.S. Senate vote. The election is January 5th, 2021. Markets will undoubtedly respond.
If the Senate remains an obstacle and firewall to Democrats’ tax increases, the Stock Market will undoubtedly respond positively.
If the Democrats end up running both Houses of Congress and the Presidency, no matter how much they try to soak the rich, they still won’t be able to meet government expenses. High earning tax payers and corporations will either pass the increases along to everyone, cut back, or head for loopholes in the tax code.
About the best middle-income taxpayers can do is plan early on for retirement and try to keep up with the world’s most baffling tax code.