2020 Year-End Tax Planning for Individuals

2020 Tax Advisor

This year has presented unique obstacles for many. Before closing the books on 2020, take a moment to review the below year-end tax planning considerations in addition to this recent BKD Thoughtware® article, “Tax Policy Under a Potential Biden Presidency.” 

Income Tax Planning

Income Planning

The present economic environment might present unique income tax planning opportunities due to either changes in projected income or retroactive tax law changes. Work with your BKD Trusted Advisor™  to understand the following about your tax situation:

  • What categories of income you receive, such as income from a passive or nonpassive activity, income eligible for preferential tax rates, etc.
  • What limitations you’re subject to such as interest expense limitations, passive activity loss limitations, previous excess business loss limitations, etc.
  • What carryovers you might have from previous years to use in the present or future years such as passive loss carryovers, capital loss carryovers, qualified business loss carryovers, net operating losses, charitable contribution carryovers, etc. 

Careful planning and discussion around your current and future tax situation can help maintain an efficient tax strategy in some of the most challenging or prosperous economic times. 

Charitable Giving

Charitable giving remains a key strategy to reduce income tax for taxpayers electing to itemize their deductions. To provide taxpayers with additional incentive to donate during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act included several tax provisions applicable to charitable giving in 2020—view this Thoughtware article to learn more. 

Other charitable giving considerations:

  • Contributing highly appreciated securities outright instead of cash can generally offer tax savings.
  • If security values have decreased in the current economic environment, consider whether a cash gift would offer a greater benefit, especially given that cash gifts made to qualifying organizations escape any adjusted gross income limitation in 2020.  

Health & Education Savings

  • Consider contributing to an HSA if you’re covered by a high-deductible health plan in 2020. Taxpayers with self-only coverage can deduct up to $3,550 ($7,100 with family coverage) for 2020. An additional $1,000 contribution is permitted if the eligible taxpayer is at least age 55. 
  • Self-employed taxpayers may be eligible to deduct amounts paid for medical, dental, vision, and/or long-term care insurance for themselves, their spouses, and/or their dependents. In general, taxpayers are eligible if they meet any of the below criteria: 
    • They reported net profit on Schedule C or Schedule F 
    • They’re a partner with net earnings from self-employment reported on Schedule K-1
    • They used one of the optional methods to figure net earnings from self-employment on Schedule SE
    • They received wages in 2020 from an S corporation where they were a more than 2 percent shareholder 
  • Consider contributing to a 529 plan or Coverdell education savings accounts to help ease the burden of future qualified higher education expenses. Any investment growth is federally income tax-free to the extent distributions don’t exceed qualified expenses, and many states offer income tax benefits for qualifying contributions. Keep in mind, taxpayers also can use 529 plan distributions to pay up to $10,000 of elementary or secondary school expenses per student per year. 

Retirement Planning 

  • Consider converting nondeductible individual retirement account (IRA) contributions up to $6,000, or $7,000 if you’re age 50 or older, to a Roth IRA. The conversion would be tax-free for many taxpayers because the original IRA contribution was nondeductible and any growth won’t be subject to tax on distribution.
  • Self-employed taxpayers can establish and contribute to certain qualified retirement plans such as a Simplified Employee Pension (SEP). A SEP, for example, allows employers to contribute to traditional IRAs setup for employees and provides a deduction up to 25 percent of net earnings from self-employment (up to $57,000 for 2020).

Business Income Tax Planning

View this Thoughtware article for year-end planning considerations applicable to business owners.

Wealth Transfer Tax Planning

The down economy, historically low interest rates, and nearly doubled lifetime exemption through 2025 present an opportune time to effectively transfer wealth and work toward financial security for your families and community well into the future. 

  • View this Thoughtware article to learn more about basic lifetime gifting considerations and more significant wealth transfer strategies advantageous in the current economic environment. 
  • View this Thoughtware article to understand techniques for transferring your business during this economic downturn.

For more information, reach out to your BKD Trusted Advisor or submit the Contact Us form below.

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