3 Year-End Tax Planning Ideas
By Michael McKeown, CFA, CPA - Chief Investment Officer
There is still time to optimize your tax situation before year-end. Markets have recovered from their lows of 2020, and tax planning and investment strategies can still deliver additional value. Below are three key areas that we like to look at for clients as we approach the end of the year.
With the changes to the tax code, taxpayers who use the standard deduction are not able to write-off charitable donations. For 2020 though, the CARES Act gives taxpayers who take the standard deduction the opportunity to donate and receive a deduction of up to $300 this year.
If a taxpayer is itemizing deductions, there are many ways charitable donations can be useful. Donating appreciated securities is an option. This gives the taxpayer the option to repurchase the same security later at a new cost basis.
Donor advised funds are great for investors who want to write-off a donation in one year and give funds away over time to a variety of charities. Also, if a taxpayer is not going to itemize in the future, then donor advised funds make sense in order to front-load the charitable deduction.
The tax code allows realized capital gains to be offset by capital losses. In addition, $3,000 in capital losses can be used to offset ordinary income.
Traditionally, people wait until the end of the year to look at realizing losses for tax purposes. This year, the equity sell-off in March provided an ideal time to harvest tax losses from equity positions, which we did on behalf of clients. A few asset classes and equity sectors in portfolios may offer loss harvesting opportunities as we approach year-end.
For investors with significant capital gains (from selling public stocks, real estate, or even a private business), opportunity zone funds are an option to consider. Investors in a qualified opportunity zone fund (QOF) can defer and lower the tax amount owed on the realized capital gain. In addition, if the QOF is held for over 10 years, then no capital gains tax is owed on the QOF investment.
Even capital gains taken in 2019 can be used for a QOF if invested prior to year-end 2020. Guidance released by the Treasury and IRS allows for investors whose 180-day window fell between April 1, 2020, and July 15, 2020, to extend the investment window to December 31, 2020.
Of course, it is important to not let taxes wag the tail of the investment dog. A QOF should stand on its fundamental investing merits, with any potential tax advantages as a bonus.
Retirement Plan Contributions
Now is a great time to double check contributions for the past calendar year. It is also good to plan for next year. The IRS made it easy, with nearly all limits the same for 2021 (except for SEP IRAs & Individual 401(k) plans, which bumped up to $58,000).
The table below shows the limits and deadlines for 2020:
|2020 Limit||Contribution Deadline|
|401(k), 403(b), 457 Limit||$19,500||12/31/2020|
|Retirement plan catch-up if age >50||$6,500||12/31/2020|
|SEP IRA||$57,000||4/15/2021 + extensions|
|Individual 401(k)||$57,000||Must establish by 12/31/2020|
|IRA catch up if age >50||$1,000||4/15/2021|
|SIMPLE IRA||$13,500||Set up by October 1, 2020|
These are three simple areas that only just scratch the surface of prospective tax planning for investors.
With the CARES Act, Paycheck Protection Program, and other new items this year, there are many areas for individuals, businesses, and owners to consider. For more tax planning ideas, check out Marcum's 2020 Year-End Tax Guide.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Marcum Wealth, or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Marcum Wealth. Please remember to contact Marcum Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Marcum Wealth is neither a law Firm, nor a certified public accounting Firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Marcum Wealth's current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request. Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Marcum account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; ( 2) comparative benchmarks/indices may be more or less volatile than your Marcum accounts; and, (3) a description of each comparative benchmark/index is available upon request.