Planning · November 25, 2020

2020 Year-End Tax Planning Guide

As the American tax laws change annually, so do the ways to minimize your tax liability. Here are some strategies for you to consider. Before you take any action, be sure to meet with your First Citizens consultant along with your tax and legal advisors to build a customized strategy for you and your financial situation.

Income tax management

The Tax Cuts and Jobs Act of 2017 (TCJA) afforded many Americans some tax savings by lowering the top income tax rate and broadening the income ranges for each bracket. However, it also eliminated most itemized deductions, resulting in higher taxes for other taxpayers. As with any year, there are a number of income tax planning items to consider.

  • Check your bonuses and manage your tax bracket: Be aware if you moved into a higher tax bracket and the implications. Tax brackets move more slowly with inflation now that a different cost of living indicator is used. You may need to increase withholding or estimated payments if you moved into a higher bracket to avoid a penalty.
  • Note the recognition of event income: Large one-time income amounts can impact your tax bracket.
  • Timing of business expenses: Be especially aware of the impact on alternative minimum tax (AMT).

Itemized or standard deductions?

You may need to layer itemized deductions in one year rather than spreading them out. For instance, you could make three years' worth of charitable contributions in one year to take advantage of the income tax charitable deduction. Otherwise, you may not meet the deduction by giving annually.

Your checklist of itemized deduction timing includes looking at the following expenses:

  • Medical expenses: The threshold is 7.5% of adjusted gross income. Within the medical expense category, you should also check the following:
  • Medicare premiums: Open enrollment is approaching, and you may need to change amounts in your budget to reflect cost-of-living increases.
  • HSA contributions: The CARES Act expanded the list of qualifying medical expenses covered by a health savings account (HSA). Keep in mind that like IRAs, HSAs are a tax-preferred vehicle. As long as you use the distributions for qualified medical expenses, the appreciation is income-tax free. Rather than using your HSA like a reimbursement account, consider paying your medical costs out of pocket while saving the maximum allowed to your HSA, allowing those savings to grow tax-free until your retirement years when medical costs are likely to increase. Think of it like your IRA for medical expenses.
  • FSA balance: Make sure to spend the balance of your flexible spending account (FSA) within the allotted timeframe. Some employers have elected to give participants the carryover option. With the carryover option, you can carry up to $500 over into the next year without forfeiture (
  • Property taxes: The state and local cap on tax deductions was limited to $10,000 in the TCJA. If you relocated, consult a tax professional to ensure you are not considered a resident of your home state and subject to resident tax there.
  • Charitable contributions: Keep receipts of your donations. The CARES Act allows donors to get an income tax deduction for certain charitable contributions of up to 100% of their adjusted gross income. You may also donate higher amounts to a donor-advised fund this year, while making distributions over a number of years to attain the income tax deduction.

Retirement plans

The SECURE Act passed at the beginning of the year made significant changes to IRAs and retirement plans. In addition, stimulus relief legislation such as the CARES Act created some changes to retirement plan rules. As you look at your IRA and retirement plans, make note of required minimum distribution (RMD) considerations. The CARES Act removed the need to take RMDs from a defined contribution plan this year, including a 401(k), 403b or IRA.

  • Funding, employer matching and catch-up amounts: Ensure you have funded enough in your retirement account to at least meet any matching funds your employer provides. You can accomplish the recommended 10% savings goal by contributing to a retirement account. Consider adding the catch-up amount if you turned 50 this year or prior.
  • Optimize traditional/ROTH mix or consider ROTH conversions: With changes in the SECURE Act, now may be a good time to convert to a ROTH account which allows for tax-free distributions. ROTH conversions may also be timely if your account is experiencing a downturn.
  • Review net unrealized appreciation (NUAs): This may be a good time to avoid capital gains.

Education planning

As part of your family's education planning, you will want to have discussions around these items:

  • School enrollment: Consider enrolling in a local school or junior/community college to reduce costs.
  • Consider a gap year: If you do not feel you are getting the full benefits of your tuition payment a gap year is an option.
  • Timing of tuition payments: Timing of payments might help you manage your income and tax liability.
  • Funding of 529 and Coverdell accounts: Continue to fund tax-advantaged accounts.
  • Student loans and apprenticeship: The SECURE Act allows up to $10,000 from a 529 plan to repay student loans. It also allows 529 funds to go to apprenticeships. The TCJA allows use of 529s for K-12 education up to $10,000 annually per beneficiary.

Investment planning

Our investment philosophy is to encourage our families to move away from investing for just investments' sake. We help you build an investment strategy to meet your goals. Our personalized approach connects investing with the reason for your wealth.

Other year-end investment planning opportunities we encourage you to stay aware of are:

  • Gain harvesting: Harvest gains to avoid rate increases.
  • Loss harvesting: Defer harvesting losses to offset rate increases. Remember you get a $3,000 ordinary income offset. Be careful of the wash sale rules, which prevent taxpayers from repurchasing a substantially similar security within 30 days of selling at a loss.
  • Year-end mutual fund distributions: Mutual funds sometimes bundle payouts into a single capital gains distributions to shareholders towards the end of the year. The timing of rebalancing your account could increase your tax liability if you invest in a fund near the ex-date (the date the security trades without the distribution). You will have to pay taxes on the distribution, even if gains occurred before you owned stock in the fund. You also will need to have funds available to pay any taxes due on these distributions.

Estate & wealth transfer planning

It's a good time to take care of any loose ends that you have been delaying. Have your testamentary documents updated (or created if you have none). Notify your selected fiduciaries (executor, trustee, guardian for minors, etc.) of their role and the location of the documents.

Other actions to take regarding your estate and wealth transfer planning are:

  • Review your will and revocable trust: Update as needed, especially persons selected to act in fiduciary roles.
  • Make annual exclusion gifts: ($15,000 per donee for 2020).
  • Make gifts to life insurance trusts: Comply with the Crummey notification rules.
  • Consider a large lifetime gift: Lock in the $11 million estate tax exemption, indexed for inflation.
  • Pay medical and education gifts directly to the creditor: Directly paid gifts for these two purposes do not decrease the annual exclusion amount, nor are they subject to gift taxes.
  • Utilize trusts: Avoid state income taxation, such as incomplete non-grantor trusts.

Protection planning

Protection planning, while last on this list, is probably one of the most expedient things you should complete during your year-end planning. Pre-planning can help mitigate the impact of unexpected tragedies.

While completing your protection planning this year, consider the following:

  • Powers of attorney (POA) for finances and health care advance directives (HCAD): Make sure both of these documents are updated and properly signed. Notify the person you have chosen to act as agent for the POA or health care surrogate for the HCAD.
  • The POA allows your agent to act for you with regard to financial matters in your stead. Make sure the agent can locate the original document or has a copy readily available. It would also be helpful to select someone who has financial maturity.
  • The health care surrogate will need to make medical decisions for you if you are unable. The living will portion of the HCAD should give your surrogate some guidance as to what decisions you want them to make. For this role, you will want to choose someone who has emotional capacity to make these life-and-death decisions as well as their geographic proximity.
  • Beneficiary designations: Given the changes in the SECURE Act, you may want to discuss beneficiary designations of your qualified retirement accounts with a consultant. Be sure you have completed the designations with primary and contingent beneficiaries listed. Make certain it aligns with your desires, will and revocable trust.
  • Life insurance: Conduct an annual review of your policy to be sure that it is still performing as promised and fits your goals and needs.
  • Long-term care and disability coverage: Be sure you have long-term care coverage for those who are retired, or disability coverage for those who are still employed, to cover costs and care in the event you suffer a medical impairment.
  • Auto, home and umbrella coverage: Personal property insurance is always important to update annually. Make sure you have additional umbrella coverage to cover new instances such as tutors or child sitters in your home, volunteer service liability, renting secondary homes to vacationers, etc. Check the maximum on your home and auto coverage and the minimum of where the umbrella coverage starts to make sure there isn't a gap in coverage.

No matter the complexity of your situation or the uncertainty of the world in which we currently live, an early start on your planning, shoring up your saving, and developing a resilient strategy are the keys to taking control of your financial well-being.


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