Mike’s Tax Bites – Year End Planning


With the holidays approaching, I thought I would do a number of blogs on year-end planning as well as the potential tax changes under the new Biden administration.

Today, I wanted to outline some year-end tax moves for individuals. Next week, I will talk about year-end tax planning for businesses.

Thanks to the CARES Act changes in charitable contributions, the year 2020 is a good year to donate cash and property to your favorite charity. Towards the end of the year, I will provide a list of my favorite charities that you might want to consider, but as long as the charity of your choosing is an authorized 501(c)(3) charity, your deduction may be a good way to reduce your tax bite.

If you do not itemize deductions, you are not out of the charitable game. This year, you are entitled to a $300 deduction for monetary gifts to your charity of choice even if you do not itemize deductions. Thanks to the CARES Act, there are no limitations this year on monetary gifts to charity if you itemize deductions. You can deduct monetary gifts up to 100% of your adjusted gross income in the year 2020 without any limitation.

Year end is always a good time to evaluate your stock portfolio. If you have capital gains in the stock market, consider harvesting some capital losses to offset the gains and reduce your tax hit. You can even go negative on that offset up to $3000 against ordinary income.

If you were unfortunate from a health perspective in 2020, or god forbid, suffered from Covid, add up your medical expenses so that you can potentially take a tax deduction if you itemize. Medical expenses in excess of 7.5% of your adjusted gross income are deductible this year as opposed to the 10% floor in prior years.

Year-end is also a good time to take a look at a recent paystub and make sure you have withheld enough tax. Fourth quarter estimated tax payments are due by January 15th. If you under withhold tax on your paychecks, you will be subject to penalties and interest.

Lastly, the CARES Act also provides a benefit if you are having cash flow difficulties or lost your job. If you withdraw funds from a traditional IRA prior to age 59 1/2, you must add a 10% federal income tax penalty on the taxable portion in addition to the regular income tax owed. The tax provisions under the new CARES Act provides an exception to this rule. Thanks to the CARES Act, you can withdraw up to $100,000 from your IRA in 2020 without paying the penalty if the distribution is due to Covid-19. In addition to avoiding the 10% penalty, you can also avoid federal income tax by ensuring that you repay the funds into your IRA within three years.

As always, a good comprehensive tax strategy is important to saving money. Please contact me if you wish to discuss year-end tax planning for your particular tax situation.