10 12 months-Finish Tax Planning Methods for 2020


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This story originally appeared on NewRetirement.com.

This has been a year like no other. As you prepare to say a big buh-bye to 2020, use this list of year-end tax planning tips for 2020 and beyond to help launch you into a better future.

In 2020, the rules were updated for everything from tax withholding to socializing. While we can’t help too much with your social life, we can help you with taxes.

Following are 10 key end-of-year tax strategies to help you keep more of your own money.

YEAR-END TAX ADVICE #1: Make Moves Now That Benefit You in the Future

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You’ll want to prep your taxes carefully this year. However, you should also plan for the future! Why? There are actually two key reasons:

  1. Inaccurate future tax planning can result in a rather large error in your projections for retirement security.
  2. Forethought can help you retain much more of your hard-earned money

The NewRetirement Planner enables you to see your potential tax burden in all future years and get ideas for minimizing this expense. It takes forethought, but Roth conversions, taxable income shifts and other strategies can result in significant lifetime savings.

Example: Do a Roth Conversion

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By transferring some of the money from your traditional IRA into a Roth IRA, you not only turn the money you moved into nontaxable income in retirement, but it also helps to reduce your required minimum distributions (RMDs) by lowering the balances in your traditional IRAs.

However, there’s one big catch: When you do a Roth conversion, you have to pay taxes that year on the money you moved to the Roth account. If you have a huge balance to convert, you may not be able to afford to do it all in a single year.

On the other hand, splitting the conversion out over five or 10 years would reduce your annual and total tax bill for the converted money.

YEAR-END TAX ADVICE #2: Reduce Taxable Income

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The most basic and powerful way to cut your taxes is to cut your taxable income. You can do this in a number of ways: Find sources of nontaxable income, use deductions to remove income from your taxable total, and grab any tax credits you qualify for.

Here are a few specific examples.

Try Tax-Loss Harvesting

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If you sell investments that aren’t tucked away in a tax-advantaged or tax-deferred retirement account, you’ll have to pay capital gains taxes on the profits you made from those investments.

However, if you sold any investments at a loss in your taxable accounts during the same year, you can wipe out those gains for tax purposes and avoid paying the related taxes.

This approach is known as tax-loss harvesting, and it could be especially useful in 2020 if you sold any assets in a taxable account during the March market panic.

In fact, if you have more losses than gains, you can use the extra losses to erase up to $3,000 of other taxable income (including the distributions from your traditional IRAs).

Consider Bundling Medical and Charitable Deductions Into Certain Years

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Because the threshold for deductions on medical expenses and charitable donations is higher, you may want to consider bundling those expenses into certain years and only claiming them every two or three years.

Max Out Medical Expenses: By grouping as many non-emergency medical expenses as possible in a single year, you can maximize the deduction you get for those expenses. In 2020 you can only deduct expenses that exceed 7.5% of your adjusted gross income.

If you’ve already had some significant health care expenses for the year, see if you can move medical expenses that you’d normally take next year to the end of this one. For example, if you have a dentist appointment in January, move it to mid-December instead.

Long-Term Care Insurance: If you recently purchased long-term care insurance, you may be able to deduct the premiums. The older you are, the more you can deduct. In 2020, the deductions range from $430 to $5,430.

Charitable Donations: Instead of making annual charitable gifts, give two, three, or even five years’ worth of donations in a single year, then take a few years off.

Focusing all of your donations in a single year increases the value of deductions beyond the threshold for a single year, and then you can take the larger standard deduction in the “skip” years.

Donor-Advised Fund (DAF): A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, family, or individual.

According to Fidelity, “A DAF may allow for tax-deductible contributions of cash or appreciated assets in a given year, but then control the timing of the distributions to charity in future years.” This is probably a strategy you will want to discuss with a financial adviser.

Still Working? Max Out Your Tax-Advantaged Savings!

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The 2020 contribution limits are:

  • $19,500 for 401(k)s, 403(b)s, 457s as well as Thrift Savings Plans. And, if you are 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000!
  • $6,000 for traditional and Roth IRAs. And the catch-up contribution for people 50 or older is $1,000. So, you can save up to $7,000 with tax advantages.

And, remember that you can max out both kinds of savings vehicles — and throw in a Roth account too!

If You Are Working, Defer Income

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Depending on your future work prospects, you may want to push some of your income — like a bonus — out till next year.

Have Long-Term Care Insurance? Payments Are Deductible

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Long-term care insurance isn’t for everyone, but if you have it, you can deduct your premiums at varying levels, according to your age.

Taxpayers who are age 71 or older can write off as much as $5,430 per person ($5,270 for 2019). If you are age 61 to 70, you can deduct up to $4,350 ($4,220 for 2019). Those who are 51 to 60 can deduct up to $1,630 ($1,580 for 2019). For people age 41 to 50, the max is $810 ($790 for 2019).

Over 72? Skip Your RMDs

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Congress passed the CARES Act in March, and President Donald Trump signed it into law on March 27. The law suspended the requirement that people with IRAs and retirement plans, including beneficiaries with inherited accounts, take a required minimum distribution (RMD) in 2020.

What is an RMD? A required minimum distribution (RMD) is the amount of money that you must withdraw from a traditional IRA, SEP, or SIMPLE individual retirement account (IRA). Normally the withdrawals must happen by April 1 following the year the account holder reaches age 72 (prior to 2020, the RMD age had been 70½ years old). The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculations.

However, if you did not already take an RMD yet in 2020, you do not have to do so and can use the waiver this year as a way to reduce taxable income.

YEAR-END TAX ADVICE #3: Think Carefully About Skipping RMDs, Strategize

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So, as explained above, you don’t have to take an RMD this year, but there are reasons to do so.

When the CARES Act was passed, the stock market had lost more than a quarter of its value in just over a month. Congress directed the IRS to suspend RMDs at that time because it seemed like retirees would be forced to sell assets at a loss.

Since March, the stock market has not only recouped its loss but also set new all-time highs. If you didn’t take an RMD yet in 2020 and you’re not planning to, you could face an even higher RMD in 2021.

Your accounts may not have taken the hit the RMD suspension was intended to help, and with a full year of robust growth, you will have more money — and fewer years to spend it — than in 2020. The result could be a higher RMD in 2021 that could push up your taxable income above what you have budgeted for.

YEAR-END TAX ADVICE #4: In a Low Tax Bracket? Pick Up Capital Gains

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Tax-loss harvesting is good if you have sold stocks that have lost money. In this topsy-turvy year, you are also likely to have some stocks that are up overall. And, now may be a good time to sell stocks that have appreciated significantly in value.

This can be a particularly good strategy if you are in the 10% and 12% tax brackets since your capital gains tax may be zero.

If you sell, you can then be repurchase your positions, which resets the basis and minimizes the amount of tax to be paid on future gains.

Even if you’re not in one of the lowest tax brackets, you may still want to sell winning stocks to reset the basis if you’re also harvesting losses.

YEAR-END TAX ADVICE #5: Pay Attention to the Medicare Surtax and Net Investment Income Tax for High Earners

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There are two types of Medicare tax that could be affected by your income level.

The Additional Medicare Tax. This tax is on any income (wages, compensation, or self-employment income) that exceeds the threshold amount for your filing status. According to the IRS, “The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.”

The income thresholds for the Additional Medicare Tax are:

  • $200,000 for single filers
  • $250,000 for married couples

The Net Investment Income Tax. The Net Investment Tax, on the other hand, is a 3.8% tax on investments if your income exceeds the same thresholds as the Additional Medicare Tax (given above). These are the types of investments subject to the tax:

  • Gains from the sale of stocks, bonds, and mutual funds
  • Capital gain distributions from mutual funds
  • Gain from the sale of investment real estate

According to the IRS, “If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.” This is particularly relevant for people who have to RMDs on tax-advantaged retirement accounts.

So it may be worth keeping your income levels below these thresholds. The NewRetirement Planner factors in these additional costs, when applicable.

YEAR-END TAX ADVICE #6: 65 or Older? Know That You Have a Higher Standard Deduction

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If you take the standard deduction instead of itemizing, your standard deduction is $1,650 higher if you are over 65.

For the 2020 tax year, the standard deduction for those 65 and older is $14,050 for singles, $27,400 if married and filing jointly (and both are over 65), $13,700 if married and filing separately, and $20,300 for a head of household filing.

Your standard deduction increases further if you are blind.

YEAR-END TAX ADVICE #7: Know How Your Social Security Benefits Are Taxed

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Social Security benefits are taxed only if your income exceeds a certain threshold.

Federal Taxes: Income for federal taxes is defined as up to 85% of your Social Security benefits (depending on your income), plus all other taxable income and some nontaxable income including municipal bond interest.

State Taxes: You also need to know your state’s rules on taxing Social Security benefits if you live in one of the 13 states that do.

2020 CARES Act Update: The CARES Act also provides some tax relief for Social Security benefits. According to the IRS, “The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits certain individuals who file Schedule SE or Schedule H to defer the payment of 50% of the Social Security tax imposed for the period beginning on March 27, 2020, and ending December 31, 2020.”

YEAR-END TAX ADVICE #8: Thinking of Relocating in 2020? Consider the Best States to Retire in for Taxes!

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Most of the wisdom shared above is most relevant to federal taxes. However, state taxes can take a big bite out of your retirement nest egg as well.

If you are considering relocating for retirement, you might as well look at states that have the most favorable tax rates for retirees. These 10 locations are the best states to retire in for taxes.


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A 529 plan provides federal tax-free growth and tax-free withdrawals for education expenses. Additionally, there may be state tax credits or deductions for your contributions to these plans.

However, consider carefully when to tap this resource. Allowing the money to grow in the tax-deferred account produces greater tax savings rather than withdrawing it now.

YEAR-END TAX ADVICE #10: Consider Getting Professional Help

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When you’ve got a lot of financial balls in the air, your tax return can get remarkably complicated. This is especially true if it’s the first year you’re taking a required minimum distribution. In that case, strongly consider getting a tax pro (a CPA or enrolled agent, not an uncertified tax preparer) to do your return for you.

Not only will you know that you’re getting every possible tax break, but you can even deduct the tax preparation fees from your next year’s return! A certified financial planner is another great resource for year-end tax advice (and proactive tax planning)! Look for one that specializes in retirement planning.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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