7 Smart Tax Planning Moves for 2020

The Coronavirus Crisis and the resulting CARES Act have created an unprecedented tax season. In addition to extended filing deadlines, several relief measures will directly affect your 2019 and 2020 taxes. 

With a new tax deadline of July 15th, it’s not too late to save on 2019 taxes. But if you are looking for savings for 2020, here are 7 smart tax planning moves you can make right now:

1. Has your income been  impacted? Adjust your tax plan. 
   • If the economic shutdown lowered your income, you might want to lower your tax withholding as well. Instead of racking up a refund on your 2020 taxes, withhold less so you can have access to that cash now. 
   • If you have “experienced adverse financial consequences due to quarantine,” you may be able to withdraw up to $100,000 in a coronavirus-related distribution from an IRA or 401k—with significantly reduced tax penalties. If you are younger than 59 ½, you won’t have to pay the normal 10% federal tax penalty for an early withdrawal. And instead of having to withhold 20% for income taxes upon withdrawal, you can either pay those taxes over the next three years OR replace the amount you took out within the next three years and not pay income taxes on the distribution at all.  
2. If you still have income, maximize your retirement contributions. 
   • 401k contribution maximums went up for 2020. You can now contribute up to $19,500 if you are under 50, and those over 50 can contribute an extra $6,500. 
   • If you expect your 2020 tax burden to be lower because of reduced income, but you still have money to contribute to a retirement fund, this might be the year to consider contributing  to a Roth 401k or  Roth IRA. Why? You might not need the tax deduction that pre-tax contributions would give you this year. If you invest in a Roth 401k or Roth IRA while the market is down, your original investment has the opportunity to grow as the economy recovers, and then you’ll get to withdraw that growth tax-free in the future. 
3. Think about converting to a Roth IRA. As Jonathan covered in his recent blog post, “10 Proactive Money Steps for These Crazy Times,” now also might be a good time to convert a portion of your traditional IRA to a Roth IRA. Yes, you will have to pay (relatively low) federal and state income tax rates on the conversion. But if you expect your taxes to be lower this year anyway, it might be worth the tradeoff for the Roth’s future tax-free withdrawal benefits. (Especially when you consider the potential growth of that relocated investment as the economy recovers.)
4. You don’t have to take required minimum distributions (RMDs) in 2020. If you are over 70 ½ or have inherited a Beneficiary IRA, your RMDs are waived in 2020. If you need the cash, you can continue taking your distributions—and paying income taxes on them. If you don’t need the money right now, you can skip the distributions this year, avoid the additional income tax, and allow your IRA to recover along with the economy. If you already took out your RMD before the CARES Act was passed, you can put it back in! Don’t worry: If you are over 70 ½, you can continue to send your IRA’s required minimum distributions directly to charity (as a qualified charitable distribution), tax free. 
5. Consider your charitable deductions. 
   • If you use the standard deduction, like the vast majority of Americans, you are eligible for the CARES Act’s  new “above the line” charitable deduction of up to $300/taxpayer. Donate directly to charity to claim this small-but-worth-it deduction to reduce your AGI and tax bill.
   • If you are able to give in a significant way in 2020, this is the year to do it—the need is great! If you are itemizing your deductions in 2020, the CARES Act has made it possible to deduct gifts up to 100 percent of your adjusted gross income. Itemizers could previously deduct up to 60 percent of their AGI with donations to charities and donor-advised funds. Donations above the previous 60% cap are limited to cash contributions given directly to charity—not donor-advised funds, unless it is a fund designated for one charity only.  If you have the means and the heart, 2020 is the year for “charitable chunking” and significant giving.  
6. Don’t forget about other savings accounts with tax benefits. College Savings 529 Plans and ABLE Savings Accounts for loved ones with disabilities can help you prepare for future expenses while the accounts grow tax-free. (Some states might also offer deductions for contributions to these plans.) Remember that the SECURE Act made it possible for 529 plan holders to use their funds to pay up to $10,000 of student loans, per plan beneficiary. 
7. Harvest losses wisely. This is another option Jonathan covered in his latest post, “Tax loss harvesting” can help you minimize your taxes in 2020: You can write-off losses on the sale of investments in taxable brokerages or trust accounts if they are sold below their purchase price. As Jonathan says, “This may sound like a bad investment choice, but the proceeds of the sale can be carefully re-invested to experience growth when the stock market comes back.” Instead of simply selling the stock and booking the loss on your tax return, you re-invest the money from the sale immediately into a similar stock to capitalize on any market gains. In 31 days, you can buy back the stock you sold, if you wish, while still claiming the loss from the sale on your taxes. 

Need help sorting through your 2020 tax planning options? We’re here to help. Set up a call with one of our Wealth Advisors today.

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