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Are You On Schedule With Your Year-End Tax Planning?

Are You On Schedule With Your Year-End Tax Planning?

As the end of the year approaches, it's time to consider strategies that could help you reduce your tax bill.

But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can't know where to go next if you don't know where you are now.

So take a break from the usual fall chores and pull out last year's tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you'll need to address while there's still time.

When it comes to withholding, don't shortchange yourself

If you project that you'll owe a substantial amount when you file this year's income tax return, ask your employer to increase your federal income tax withholding amounts.

If you have both wage and consulting income and are making estimated tax payments, there's an added benefit to doing this: Even though the additional withholding may need to come from your last few paychecks, it's generally treated as having been withheld evenly throughout the year. This may help you avoid paying an estimated tax penalty due to under withholding.

Of course, if you've significantly overpaid your taxes and estimate you'll be receiving a large refund, you can reduce your withholding accordingly, putting money back in your pocket this year instead of waiting for your refund check to come next year.

Timing is everything

The last few months of the year may be the time to consider delaying or accelerating income and deductions, taking into consideration the impact on both this year's taxes and next.

If you expect to be in a different tax bracket next year, doing so may help you minimize your tax liability. For instance, if you expect to be in a lower tax bracket next year, you might want to postpone income from this year to next so that you will pay tax on it next year instead. At the same time, you may want to accelerate your deductions in order to pay less tax this year.

To delay income to the following year, you might be able to:

  • Defer year-end bonuses
  • Defer the sale of capital gain property (or take installment payments rather than a lump-sum payment)
  • Postpone receipt of distributions (other than required minimum distributions) from retirement accounts

To accelerate deductions into this year:

  • Consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction
  • Prepay deductible interest
  • Make alimony payments early
  • Make next year's charitable contributions this year

The gifts that give back

If you itemize your deductions, consider donating money or property to charity before the end of the current tax year in order to increase the amount you can deduct on your taxes.

As an aside, now is also a good time to consider making noncharitable gifts. You may give up to $15,000 (in 2020) (twice that amount for a married couple) to as many individuals as you want without incurring any federal gift tax consequences.

If you gift an appreciated asset, you won't have to pay tax on the gain; any tax is deferred until the recipient of your gift disposes of the property.

Postpone the inevitable...

To reduce your taxable income this year, consider maximizing pretax contributions to an employer-sponsored retirement plan such as a 401(k).

You won't be taxed on the contributions you make now, and you may be in a lower tax bracket when you do eventually withdraw the funds and report the income. (Note that if you take withdrawals from the plan before age 59½, you'll generally be subject to a 10 percent penalty tax in addition to any income tax due, unless an exception applies.)

If you qualify, you might also consider making either a tax-deductible contribution to a traditional IRA or an after-tax contribution to a Roth IRA.

In the first instance, a current income tax deduction effectively defers income — and its taxation — to future years (as with a retirement plan, an additional 10 percent penalty tax will apply to withdrawals made prior to age 59½ in addition to any income tax due, unless an exception applies).

In the second, while there's no current tax deduction allowed, qualifying distributions you take later will be tax free. You'll generally have until the due date of your federal income tax return to make these contributions.

Year-End Planning Checklist

  • Review and/or update your estate plan (wills, trusts, living wills, etc.). If you don’t have an estate plan it’s time make estate planning a priority!
  • Review and/or update your beneficiary designations. Has 2020 brought about changes that may affect your estate plan, or related beneficiary designations? These might include marriage, births, divorce, or family related deaths.
  • Review your contributions to retirement plans, IRAs, 529/Edvest accounts to make sure you are maximizing contributions where possible.
  • Review tax withholdings and related quarterly estimate payments to avoid penalties
  • Complete IRA à Roth IRA conversions per your financial and tax plan documents. Since RMDs are not required in 2020, you may wish to consider partial conversions to Roth IRAs even if they haven’t done so in years past.
  • Request any Qualified Charitable Distributions (QCD) you might want to process.
  • Consider the gift of appreciated stocks to a donor advised fund or directly to a qualified charity of your choosing.
  • Review you document checklist and inform future trustees, executors and/or adult children where your estate planning documents are located. This should include passwords, (bank) lockbox(es), and other important information they will need.
  • Review your debt structure. Mortgage rates are at historically low levels so this might be the time to consider refinancing to shorter (10 – 15 year) options and to reduce interest rates.
  • If you have total assets in excess of $3.5M - $5M (or $7M - $10M for married couples) you might want to explore tax and estate planning strategies. With the presidential election, pending the outcome, there may be changes to tax rules that could impact high-income earners.
  • Capital gains rates could increase in 2021 depending upon the outcome of the presidential election. Now may be the time to reduce stock concentrations and/or rebalance portfolios at historically low capital gains rates.

Tax planning can be complicated. Consider seeking the assistance of a tax professional to determine what year-end tax planning moves, if any, are right for your individual circumstances.

Here are a few eGuides that may help answer some questions:

     Understanding Risk Tolerance, Market Volatility, and Your Financial Planning Goals
     Getting Divorced Checklist
     Getting Married Checklist
     A Guide to Fund Education and Save Dollars
     Why Use a Financial Advisor?

How SVA Can Help

TAX PLUS TAX PLANNING: Simplify your financial life.

Our professional SVA Certified Public Accountants tax advisors and experienced SVA Financial Group wealth managers work together to create a custom, comprehensive financial plan to help you reach your financial goals. We then handle the implementation to help simplify your financial life.

The unique benefits of your SVA Certified Public Accountants tax advisor and SVA Financial Group wealth manager working together for you include:

To learn more about how our integrated wealth management and tax planning solution, Tax Plus, can work for you, please contact us today.

Tax and accounting services are provided by SVA Certified Public Accountants, an affiliate of SVA Financial Group.

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The opinions expressed within this content represent the opinions of SVA Financial Group staff and are subject to change. Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and is not exhaustive. The use of investment, tax and retirement calculators is not a substitute for advice. Investors must consult their financial and tax advisors or legal counsel for advice and information concerning their particular situations. This communication does not constitute legal advice. Tax and accounting services are provided by SVA Certified Public Accountants, an affiliate of SVA Financial Group. Wealth Management services are provided by SVA Wealth Management.

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Prepared by:

SVA Financial Group

Copyright 2020

Article Topic Specialist: Colleen Johnson, CFP®, CRPC, CWS

Colleen is a Senior Wealth Manager for SVA Wealth Management. She works collaboratively with her clients’ to establish wealth management strategies designed to reach the clients’ financial goals through each stage of their lives. Servicing clients’ needs and providing objective advice are Colleen’s top priorities.

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