‘Tis the season to freak out about all the things you need to get done before year end. By YOU, I don’t mean YOU actually. You are an overachiever! You do things precisely when you’re told. This blog isn’t for YOU, it’s for your…. friend. That friend that procrastinates. That friend that piles on way too much in too little time. That friend that waits until the last minute… not YOU ;) Still, it may be worth your time to review our year end tax planning tips for procrastinators. So that you can educate your friend, of course.
Here we go…
If you have your 401(k)/403(b)/TSP contributions set for an exact dollar amount, you may have forgotten to increase those contributions for the 2020 tax year. In 2019, you could contribute up to $19,000 towards your 401(k)/403(b). That dollar amount increased $500 for 2020. Make sure your contributions reflect that increase for 2020.
Your Health Savings Account (HSA) went from an annual maximum of $3,500 (individual) / $7,000 (family) contribution limit in 2019 to $3,550 (individual) / $7,100 (family) contribution limit in 2020. For HSAs, the annual contribution limit is split between you and your employer. Therefore, if your employer contributed $1,000 this year, you should see your total contribution amount equal $2,550 (individual) or $6,100 (family).
Below is a table of popular account types and their 2019, 2020, and 2021 contribution limits. Why 2021? Because now you’re going to plan more in advance for these kinds of things… oops! *cough cough* I mean your friend will…
Where do I check to see how much I’ve contributed for the year?
The custodian that holds the assets should have a year to date contribution figure. If you can’t find that, or you’d like to cross reference the figure they are showing you, check your pay stub. Your pay stub will show you how much you’ve contributed year to date. You can then see if by your last paycheck you will have maximized all of your accounts.
We’ve heard from a lot of you this year that you wish you would have moved your cash into the market at the end of March when the market tanked. As Dan likes to remind me, don’t ‘should’ on yourself. If you eventually moved some of your cash into the market this year, don’t sell those holdings for your holiday purchases just yet. In order to receive favorable capital gains treatment on your appreciated stock, you will have to hold onto your stock for one whole year. If you sell your stock after holding it for one year, you will pay capital gains rates on the earnings. If you sell your appreciated stock before that one year timeline, you will pay ordinary income tax on the earnings. Below is the 2020 capital gains tax rates:
As a simplified example, if a single individual had a taxable income of $100,000, they would pay 15% on their $30,000 gain (assuming they held the holding for 1+ year). That amounts to $4,500 in tax. If instead they sold their investment after holding them for less than a year, they would pay ordinary income tax at 24%. That tax obligation now turns into $7,200 just for the sale of their holdings. This is a total of $2,700 more in taxes by not waiting a year. Yikes!
If you haven’t already, read our blog on ‘Should I Be Doing a Roth Conversion.’ In that article, we go into much more detail on whether or not you should consider this strategy. A Roth conversion is simply moving funds from a Traditional IRA or Pre-Tax Employer Plan to a Roth IRA or Roth Employer Provided Plan. You are subject to the taxes owed on this conversion. Why would you do this? You may be in a situation where you expect your tax rate to be higher than it is today. For example, since Dan and I started a business, our income is currently lower than what it used to be, and lower than what we project it to be in the future. Therefore, we went ahead and conducted a Roth conversion this year.
Although you don’t get any tax benefits on the federal side, you may get tax benefits on your state tax return if you contribute to a 529 Plan. There are over 30 states that allow you to take a deduction. For example, the state of Minnesota offers a $1,500/yr deduction for single filers and $3,000/yr deduction for joint filers. New York, Pennsylvania, Wisconsin, Iowa, Colorado, Massachusetts, Oregon, and Utah all provide some sort of state tax incentive. Here is the full list of states that offer 529 Plan tax benefits.
If you find yourself with highly appreciated stock, a high investment balance, and/or a high cash balance and you are charitably inclined, this strategy may be for you. In the year you transfer assets to a Donor Advised Fund, you get a one time charitable deduction for that amount (versus when the charity receives the funds). This may be worth your while if you expect this amount will allow you to itemize your deductions rather than taking the standard $12,400 deduction for single filers and $24,800 deduction for joint filers.
Here’s how this could work...if you’re like us, you make monthly charitable contributions. With a Donor Advised Fund, you would front load your 2021 monthly contributions into this account. You will then take the amount you contributed as a deduction this year assuming you do it before the 2020 year end and you are able to itemize your deductions. The charity can then receive your contribution as a one time payment or you can establish monthly distributions from the Donor Advised Fund. However, even though the distributions from the account are happening in 2021, you already took the deduction in 2020 and therefore cannot take a second deduction when the funds actually go to the charity.
Don’t forget about the $300 deduction available this year...
Even if you don’t contribute to a donor advised fund, the CARES Act stimulus bill may still allow you some tax benefit for donating cash to charity this year. The stimulus bill included a one time $300 "above-the-line" deduction for cash contributions to charity.
There you have it! I mean… for your friend of course. Trying to knock out tax planning strategies with less than three weeks left in the year is certainly possible. It makes it a whole lot easier if you have a team of experts who will help you AND your friend.
Send us an email at firstname.lastname@example.org to discuss your specific year end tax strategies.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.