2020 Individual Year-end Tax Planning
Do a financial checkup
2020 been an interesting year due to COVID-19. For those who were affected, their income has fluctuated due to job loss, less hours worked, etc. The best place to start your financial check up is your latest paystub. If you are feeling overwhelmed by the amount of taxes you’ve paid this year, and want to avoid a potentially large tax bill, you may still have time to adjust your tax withholding. If you received unemployment, and it wasn’t initially taxed, you can adjust withholding for the last few weeks of the year. Additionally, if you have extra money in savings, now would be a great time to invest those extra funds to maximize your tax advantages. You can consider making contributions to a health savings account (HSA), educational savings accounts, and IRA’S.
Make a giving plan
In previous tax years, charitable contributions were only deducted if the taxpayer itemized their deductions. This year, due to the CARES Act, taxpayers who don’t itemize deductions are able to take a charitable deduction of up to $300 for cash contributions.
Understand your federal stimulus money
If you received the stimulus check because your income in 2018 or 2019 was below the threshold but end up making above the income threshold for 2020, you get to keep that money. If you made higher income in 2018/2019 and did not receive the stimulus check, but this year you were under that income threshold, you will receive the stimulus money as a credit when you file your taxes.
Be aware of 2020 distribution opportunities
If you are over the age of 72, you will want to understand the rule changes for RMD’s (required minimum distributions) this year. Typically, you are obligated to take RMDs from your retirement accounts at age 70 ½ but this has now changed to 72. However, the CARES Act suspends all rules for 2020 and you don’t have to take any RMDs this year if you don’t want to.
Normally, taking money out of a retirement account before age 59 1/2 usually triggers a 10% early withdrawal penalty. However, the early withdrawal penalty won't apply to those who withdraw up to $100,000 to cope with coronavirus costs before Dec. 31, 2020. Those who test positive for COVID-19 or who have a spouse or dependent with the illness are eligible for penalty-free early withdrawals. You can also take penalty-free distributions if you experienced financial hardship as a result of the pandemic because you were laid off, quarantined, furloughed or unable to work because of a lack of child care. However, retirement savers will still owe income tax on withdrawals from traditional 401(k)s and IRAs.
When you take a distribution from a traditional retirement account, income tax will be due on the amount you withdraw. If you take a 401(k) withdrawal to cope with an emergency expense, you could end up with an abnormally large tax bill at the end of the year. However, the CARES Act allows you to pay the 2020 income tax bill over a three-year period.
Additionally, retirement savers who take a coronavirus emergency withdrawal also have the option to put the money back in a retirement account within three years of the distribution.