End-of-Year Tax Reduction Strategies and What to Expect for 2021

As we rapidly approach the end of 2020, it’s almost time to wrap on the types of moves that will make a difference for this year’s income taxes. Think carefully about the money you have made this year and what income tax bracket it puts you in; then, consider how your investments have performed. Taking both of these circumstances into account could help you figure out which of the following moves could benefit you.

Here are five things to keep in mind as we glide into the next year.

1. Donate Appreciated Stock or Property

Maybe you were already thinking about donating cash to a 501(c)(3) organization, but if you donate appreciated stocks or property you can write off both the value of the gift as well as the capital gains on the appreciated value. This gives you twice the tax benefits, all from one asset.

2. Embrace Loss Harvesting

If you held investments like stocks or funds in 2020 that were subject to losses, consider selling them off now. You can use up to $3,000 of these losses to offset any capital gains you may have accrued in the year.

3. Max Out Your Retirement Contributions

If you are contributing to a 401(k), you really have until the end of the year to contribute; this money is tax-free. 401(k) contributions are limited to $19,500 if you are under 50 years of age, and $26,000 for individuals aged 50 and older. You have until the standard filing deadline to contribute to IRAs, so you have a bit more time.

4. Cancel Your RMD

The 2020 CARES Act waived the required RMD for this calendar year, and gave the public until August 31 to reverse the distribution if it was taken. However, if you took a distribution, a financial advisor can work with you to either roll it over into 2021 or to characterize it as coronavirus-related.

5. Pick Up Capital Gains

Particularly if you are in a lower tax bracket, selling your high performing stocks now might allow you to pay less (or even nothing) on capital gains. You can repurchase the stocks in the new year at the higher value and reset their cost basis.

Of course, for direct, personalized advice, your best bet is to meet directly with a financial advisor. Together, you can develop an effective plan for money and asset management as you review your finances and discuss your goals. Your advisor will be able to deliver insights tailored to your situation, and incorporating the most up-to-date information on the types of products and practices that are available, as well as the latest regulations to which you must adhere.

But this coming year stands out as a bit different than most, now that we’re freshly out of an election that brought a new President, and with it rumors of tax hikes for higher income brackets. What can we expect as 2021 rolls in and President Biden takes over?

  • Tax cuts, particularly in low-income and middle-income households.
  • Tax hikes for corporate businesses
  • An urgent need to revisit the GOP’s tax plan, which includes provisions that will expire in 2025

While he is still mapping out his personnel and cabinet appointments, Joe Biden has not given any further updates on the tax platform that was part of his campaign other than to reassure that his opposition’s claims of his intentions to hike up taxes are unfounded. We have yet to see how specific programs like Medicare will be impacted by Biden’s planned healthcare reforms, as well as whether there will be any major changes to retirement options. As runoff elections are set to happen in Georgia for two Senate seats, the outcome could have a massive impact on future policy. Much still remains up in the air, but the course of the next few months should help to offer some clarity.


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