The holidays are right around the corner, though many of the family traditions we’ve come to treasure may look different this year. However, during this pandemic we’ve discovered new and innovative ways to remain connected.
This year also has brought with it a myriad of new tax rules designed to help people weather the financial impact of COVID-19. As you start to make a plan to handle 2021, it’ll be important to know how those tweaks and changes fit in.
Here are a few of the things to keep in mind as you begin your year-end tax planning:
- Realize losses to offset gains recognized on investments during the year: If you have sold stock at a capital gain during the year, you can reduce that gain by selling stocks that show losses.
- Arrange with your employer to defer your bonus until 2021 and/or adjust your withholdings: Shifting income to next year will reduce your taxable income for this year and, if you take a bonus at year end, be sure to adjust your tax withholdings to cover the increase in income.
- Increase basis in an S corporation or partnership to make possible a 2020 loss deduction: Shareholders and partners are able to take losses from their investment only if they have sufficient basis. One way you can increase basis is by making a capital contribution!
- Explore strategies such as funding retirement plans or consider the timing of required minimum distributions from a retirement plan: When you make retirement plan contributions you not only plan for the future, but you may even get a tax break in the current year! Depending on your age, required minimum distributions from a retirement plan may affect your taxable income and should be appropriately taken to avoid penalty.
- Settle an insurance or damage claim only if it will maximize a casualty-loss deduction attributable to a federally declared disaster: Finalizing such claims before the end of the year could allow for a casualty loss deduction which reduces taxable income.
- Apply a bunching strategy to increase deductible amounts: Paying for two years worth of itemized deductions in a single year, such as real-estate taxes or medical expenses, may put you over the standard deduction threshold and allow you to itemize.
- Make qualified cash donations by year-end to claim up to a $300 above-the-line deduction on top of the standard deduction: This is an opportunity for those who don’t qualify to itemize and get the tax benefit of making charitable donations.
- Make gifts to take advantage of the gift-tax exclusion for 2020: That’s right, you can give someone up to $15,000 tax-free money and not have to report the transaction.
- Consider deferring a debt-cancellation event until 2021: Forgiven debt is taxable income and shifting that income to the following year allows for you to keep your taxable income lower and provides you time to cover the related taxes.
It’s a lengthy list, but keep in mind it isn’t an exhaustive list. it’s likely all of these strategies won’t apply in your situation, but it’s a good starting point as you start to think about how to put together a plan of action. At Padgett, we have a network of trusted accountants and tax experts who can create a customized plan that best suits your needs. Find an office near you today, and let our team get to work.