With the strange year that we have had, it may be hard to believe that December 31st is just around the corner.  However, before we wave goodbye to 2020, you may wish to review the following strategies to see if there are any tax breaks applicable to you.   

1. Coronavirus-related Distributions

Under the CARES Act, qualified individuals can withdraw up to $100,000 from their IRA and/or retirement plans without being subject to the normal 10% penalty.  The taxable income can be spread over 3 years to ease the tax burden.  Deadline: December 31, 2020.   

2. Qualified Charitable Distributions

Individuals over the age of 70 ½ can elect to gift directly to charity from their IRA’s.  If done correctly, the distribution is not taxable and there is no need to itemize on your tax return.  Transfers of up to $100,000 are eligible.  QCDs are the most tax-efficient way to reduce your IRA balance with the added benefit of helping the charity of your choice.  Deadline: donations must be received by charity before December 31, 2020.  

3. Roth Conversions

As we wrote in our blog “The Year of the Roth conversion,” 2020 may be the perfect time to do a Roth IRA conversion given the low tax rates and depressed market values.  Also, since RMD’s are suspended in 2020, older clients may have a unique opportunity to convert a portion of their conventional IRAs to a Roth.  The deadline is December 31st, but allow enough time to have your custodian process the paperwork. 

4. Net Unrealized Appreciation Strategy

If you are lucky enough to have highly appreciated stock in your 401(k) and are using the net unrealized appreciation (NUA) tax break, be sure to follow the rules.  NUA allows the taxpayer to pay ordinary income tax on the cost basis of the shares, not the total value, when withdrawn.  However, the entire account must be emptied in one calendar year.  If this applies to you, talk to your CPA to make sure that you comply.  Deadline: December 31.  

5. Maximize Retirement Contributions

Now is a good time to review your retirement plan contributions for 2020 and adjust if necessary.  The maximum contribution to a 401(k), 403(b), or 457 plans is $19,500 (plus a $6500 catch up if you are age 50 or over at the end of the calendar year).  SIMPLE plans allow $13,500 (plus $3000 catch up if you are 50 or over).  Salary deferrals to retirement plans must be made through payroll.  Deadline: December 31.  

6. Family Gifting

For wealthier clients who are looking to remove assets from their estates, annual gifting should be an ongoing strategy.  Currently one can gift $15,000 per year to anyone without impacting the lifetime gift/estate exemption and couples can double this amount to $30,000.  Secondly, although the current estate and gift tax exemption is $11,580,000 per person, this is scheduled to be reduced to $5,000,000 in 2025.  Congress could easily limit this even sooner given our current economic environment, but gifts made in 2020 lock in today’s gifting limits.  Note that larger gifts of medical expenses or tuition made directly to institutions are not considered taxable gifts and do not consume any of the lifetime exemption amount. Deadline: December 31, 2020.  

7. Start a Retirement Plan

If you are self-employed and have not started a business retirement plan, take a good look at doing so before year-end.  While the maximum contribution for IRAs is capped at $6000/year (plus $1000 catch up), plans such as SIMPLE IRAs, SEP-IRAs, and Individual 401(k)s are significantly more. Our article “Small Business Retirement Plans” goes into more detail on the options available.  The deadline to establish an Individual 401k is December 31, other plans vary.  

8. Help Others in Need

New CARES Act legislation in 2020 allows taxpayers to deduct up to $300 in cash contributions to charity without itemizing deductions.  This is a great time to help others who desperately need it.  Make sure that contributions are made prior to December 31 to be eligible.  

9. Harvest Your Losses/Realize Your Gains

At Metis, we annually review accounts for tax-loss harvesting to offset realized gains in portfolios that we manage.  This process can reduce taxes owed and may even result in a loss of up to $3000 that can be taken against ordinary income.  This year, with the prospects for increased taxation of realized gains it may also make sense to consider realizing some capital gains in 2020 rather than deferring them.  Deadline: December 31.   

10. Fund 529 Plans

For education saving, it is hard to beat the 529 plan. Accounts grow tax-free and withdrawals are not taxed if used for qualified education expenses.  Over 30 states currently offer a state income tax credit or deduction for contributions made to these plans.  Donors can use their annual $15,000 gift tax exclusion or pre-load up to 5 years of gifts at $75,000 per person per recipient!  The contribution deadline is December 31 for tax credits and gifting purposes.