The Focus - Our Tax E-Newsletter

Tax Planning: A "Perfect" Ending to 2020 Part 1


As we wind down this crazy uneventful, but somehow eventful, year we all know what that means. It’s time to think about 2020 year-end tax planning and tax planning strategies for 2021.  Even though our favorite concerts, social gatherings, graduations and other events were cancelled in 2020, we all know taxes will not be cancelled; delayed - maybe, extended - perhaps, but certainly not cancelled.

Below is Part 1 of 2020 Tax Planning: Tax Planning Strategies for Individual Taxpayers.  Part 2 will include tax planning strategies for Businesses.

A few last minute 2020 tax planning ideas:

  • Charitable Donations - If you are fortunate enough to still be able to itemize your deductions, make sure to write those last minute checks, drop off your gently used clothing or furniture, or donate stock to your favorite qualified non-profit organizations.  Do not forget to obtain appropriate written documentation to support the donations.

If you can no longer itemize due to the increased limits, you can still take advantage of 2 tax planning strategies while supporting your favorite charity.  First, the CARES Act, passed in March 2020, allows taxpayers to deduct up to $300 for qualified charitable cash donations for those that cannot itemize.  This is an "above-the-line" deduction as long as you can provide proper documentation.  Another strategy to reduce your tax liability, is a Qualified Charitable Distribution (QCD) from your IRA account.  A QCD is a direct transfer of funds from your IRA payable to a qualified charity.  QCDs can be counted toward satisfying your required minimum distributions (RMDs - more on this later) for the year, as long as certain rules are met.  In addition to the benefits of giving to charity, the amount of the QCD is excluded from taxable income on your tax return.  You must make sure you obtain adequate documentation from the charity as well. 

  • Gifting - As an individual, you can gift up to $15,000 to any number of recipients without incurring any tax consequences.  If you're married, your spouse can also gift up to $15,000 to any number of recipients, without tax consequences.  That means together $30,000 to each recipient can be excluded from your estate, tax-free.
  • ROTH IRA Contribution - Do you have working children? Consider setting up a ROTH IRA while their income is low, and allow the contributions to continue growing throughout their careers.  The maximum contribution for 2020 (and 2021) is $6,000 ($7,000 for those individuals over 50).  The earnings from the ROTH IRA may be withdrawn tax and penalty free.  This is one of the major benefits of a ROTH IRA. Of course there are some caveats to consider when making a withdrawal from a ROTH IRA, but it will be some time before your children will need to make any withdrawals.
  • 401(k) Contributions - Consider maximizing your 401(k) contribution for 2020.  For 2020, employees can defer up to $19,500 into their 401(k) plan ($26,000 if age 50 or older).  Contributions to 401(k) plans are pre-tax.  Therefore, not only are you helping reduce your tax bill now, but you are saving for the future.  The maximum amounts remain the same for 2021.
  • Other Retirement Plan Contributions – If you do not have a 401(k) or are not eligible for one, consider contributing to a traditional IRA with a maximum contribution of $6,000 for 2020 ($7,000 if age 50 or older).  If you are self-employed, you can defer the lesser of $57,000 or 25% of net earnings from your self-employment income, up to $285,000, into a profit sharing/SEP plan.
  • Required Minimum Distributions (RMDs) from your retirement account - Both the SECURE Act and CARES Act brought significant changes to this area.  The SECURE Act increased the RMD to age 72 (from 70 1/2), beginning January 1, 2020.  Then CARES Act waived RMDs for 2020.  If you already received your RMD before the CARES Act was passed on March 27, 2020, then unfortunately, there is nothing you can do. You will be required to report the income in 2020. 
  • Timing of income (or losses) - Consider managing the timing of income and/or losses and delay or accelerate depending on other income source factors.  For example, if you anticipate large capital gains for 2020 this may cause more of your Social Security Benefits to be taxable, or push you into a higher tax bracket, therefore increasing your tax liability.  If possible, delay the capital gains to 2021, which could be offset by capital losses.  With these types of "what if's", its often best to analyze different scenarios to anticipate the lowest tax liability option.

Tax planning ideas for 2021:

  • Medicare - You often hear the cliché, age is just a number, but in the tax arena it could mean much more than that.  If you are going to be turning 65 years old in 2021, you will be eligible for Medicare.  If you are still working and receiving health insurance benefits through your employer, you may be able to come off your employer's group insurance plan.  If you are contributing your insurance plan premiums as pre-tax contributions, these will now be considered wages, and will be taxable.
  • Required Minimum Distributions - RMDs resume to normal in 2021.  If you are going to turn 72 during 2021, you will be required to take an (RMD) from your IRA account.  You will want to make sure you have withholdings taken from these distributions.  You should also consider the amount of your RMD compared to your other income.  The amount of your RMD may increase your income levels causing your social security income to be taxable, or impact your tax bracket. 

There are many strategies to consider when tax planning.  These are just a few items to consider before year-end.  Often, more than one tax planning scenario will need to be analyzed in order to properly manage your tax liability and cash flow come April. As always, please contact your Dermody, Burke & Brown advisor if you want to discuss any year-end tax planning ideas or if you have any questions.


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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