December 10, 2020

3 Year-End Tax Planning Ideas

By Michael McKeown, CFA, CPA - Chief Investment Officer

Man using calculator and bookkeeping

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.

Charitable giving

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.

Capital gains

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
IRAs $6,000 4/15/2021
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.

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