Year end - Tax Planning Tips
The Coronavirus Aid and Economic Security (CARES) Act loosens some tax laws that affect tax planning. Here are a few:
Maximize Charitable donations
This year whether you itemize you can deduct charitable contributions. If you take the standard deduction, (CARES) Act allows you to deduct up to $300. For those who can itemize, the CARES Act temporarily raises the ceiling on charitable deductions for cash contributions to public charities to 100% of your (AGI). Therefore, you may be able to reduce your taxable income or completely offset your taxable income. Also please use my enclosed noncash donation guide to track your noncash donations.
Losses
The stock market has been volatile. You may have incurred more losses than last year. However, these capital losses can be used to offset capital gains recognized this year. You may deduct up to $3,000 if married filing joint. You can always repurchase the stocks but must wait 31 days or the capital loss is a wash sale and is not deductible.
Distribution from qualified plans and IRAs
CARES Act allows qualified taxpayers impacted by COVID-19 to withdraw up to $100,000 from certain qualified plans and IRAs as a “coronavirus related distribution”. The 10% early withdrawal penalty will not apply, such distributions remain subject to federal income tax. The CARES Act allows a coronavirus related distribution to be taken into gross income over three years unless the taxpayer elects to take it all into gross income in 2020. If you received a coronavirus related distribution, you should determine which method of inclusion you will use. Thereafter, you may wish to adjust your withholding or estimated tax payments for 2020. The CARES Act also allows coronavirus related distributions to be repaid within three years.
529 Plans
Having a 529 plan is a great way to save for educational expenses. They grow tax-free and distributions for qualified higher education expenses are tax-free. Most states allow a deduction of your contributions to a 529 plan and some states give you a tax credit. Virginia for example allows a $4,000 per child deduction which reduces your state taxable income.
Medical Expenses
The medical expenses deduction will increase from 7.5% back to 10% of your AGI in 2021. See https://www.irs.gov/publications/p502#en_US_2019_publink1000178851 as to what medical expenses you can deduct. The CARES Act also expanded what is reimbursable for “qualified medical expenses" for (HSAs, MSAs, Health FSAs, and HRAs). Specifically, the cost of menstrual care products, over the counter items, and medication are now reimbursable. FSA use-or-lose rule allows up to a $500 carryover of FSA funds.
Traditional to Roth
Converting a traditional IRA to a Roth may save you in taxes in the long-term. It is a strategy that allows you to pay income taxes on some or all your retirement assets today rather than when you withdraw them in retirement. Distributions are generally not taxed when you withdraw contributions and earnings if your Roth IRA is at least five years old and at least age 591/2. If not, the earning portion may be subject to taxes and 10%penalty unless exceptions apply. No minimum distributions (RMD) is required.
Please contact me for more details.
Thank you for your business! Stay safe!