Tax planning should be a priority year-round, but many of us scramble at year-end. This year includes unique tax planning opportunities afforded by the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), especially if you are temporarily in a lower tax bracket. The following are some tax opportunities you may be able to utilize.
MAXIMIZE CONTRIBUTIONS TO RETIREMENT PLANS
Maximize contributions to workplace retirement plans and IRAs. While many employer plan and IRA contributions are pre-tax, Roth or post-tax contributions can be made to some retirement plans and to Roth IRAs. Depending on your specific tax situation, one option may be more advantageous than the other.
Individuals age 50 and above may make additional contributions. See the chart below for maximum contribution limits.
| 2020 RETIREMENT PLAN CONTRIBUTION LIMITS | |
| Elective Deferrals: 401(k), 403(b), 457, TSP | $19,500 |
| Age 50+ Catch-up Contribution | $6,500 |
| Self-Employed: Solo 401(k), SEP IRA | $57,000 |
| Defined Benefit | $230,000 |
| SIMPLE Plan | $13,500 |
| Age 50+ Catch-up Contribution | $3,000 |
| IRA and Roth IRA | $6,000 |
| Age 50+ Catch-up Contribution | $1,000 |
| * Some contributions are limited based on income. |
HEALTH SAVINGS ACCOUNTS (HSA)
Health Savings Accounts (HSA) are a great way to contribute and save pre-tax money for medical expenses. HSA growth and withdrawals are tax-free if used for qualified medical expenses. Unlike Flexible Spending Accounts, HSAs can be saved for future needs. HSAs have the following contribution limits.
| 2020 HEALTH SAVINGS ACCOUNT LIMITS | |
| Individual | $3,550 |
| Family | $7,100 |
| Age 50+ Catch-up Contribution | $1,000 |
FLEXIBLE SPENDING ACCOUNTS (FSA) AND DEPENDENT CARE FLEXIBLE SPENDING ACCOUNTS (DCFSA)
Like the Health Savings Account (HSA), you can contribute pre-tax money to a Flexible Spending Account (FSA) for qualified medical expenses. FSAs have several limitations and different employers have varying plan rules. FSA contributions are elected for the year during open enrollment or at a qualifying life event. The FSA balance must be used by year-end, although in some circumstances, you may rollover $500 to the following year or get a 2 ½ month grace period after year-end.
In addition to a FSA, a Dependent Care FSA (DCFSA) can be used to pay for qualified dependent care expenses for certain dependents with pre-tax money.
FUND A 529 COLLEGE SAVINGS PLAN
529 College Savings Plans are great for saving towards college tuition and expenses and may also be used to pay up to $10,000 per year for private and religious K-12 school tuition. Your money grows and withdrawals are tax-free if used for qualified education expenses. Some states offer a state tax deduction, up to a limit, for contributions made by year-end.
ROTH IRA CONVERSIONS
Growth and withdrawals of balances in Roth IRAs and Roth employer plans (i.e. Roth 401(k), Roth 403(b), etc.) are generally tax-free. You are able to convert some or all of traditional IRAs and employer plans to a Roth version. Conversions are taxable, so careful planning is required.
CORONAVIRUS RELATED RETIREMENT ACCOUNT DISTRIBUTIONS
Qualified individuals under the 2020 CARES Act can take Coronavirus related distributions up to $100,000 from retirement accounts in 2020. These distributions are not subject to the usual 10% penalty if you are under age 59 ½, and you may either pay taxes on the full amount in 2020 or spread the tax impact over three years. A distribution, even if unnecessary, could be beneficial for certain individuals who are temporarily in a lower income tax bracket in 2020.
2020 REQUIRED MINIMUM DISTRIBUTIONS ARE WAIVED
Required minimum distributions (RMD) are suspended for 2020 due to the 2020 CARES Act. This applies to IRAs, employer plans and inherited retirement accounts which would normally be subject to RMDs. If your RMD is setup to be distributed automatically, adjust the date(s) if the RMD is not currently needed.
For people who are temporarily in a lower tax bracket for 2020, it is important to decide if it is advantageous to take a retirement account distribution while in a lower tax bracket.
INHERITED RETIREMENT ACCOUNTS
Inherited retirement accounts for non-spouse beneficiaries in 2020 and beyond must follow new rules due to the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Account balances must be withdrawn within 10 years after the year in which the death occurred. Tax planning is key to determine the most tax efficient timing for withdrawals.
The SECURE Act of 2019 also impacts certain trusts that are the named beneficiaries of retirement accounts. This strategy should be reviewed by an estate planning attorney.
CHARITABLE GIVING
Charitable giving positively impacts individuals in need and can also have tax advantages. There are a variety of strategies such as using cash, securities, donor-advised funds (a.k.a. charitable gift funds) or gifting from taxable IRAs for individuals age 70.5 and older. To learn more about these options, read the following article.
GIFTING TO FAMILY MEMBERS OR OTHERS
In 2020 you can give up to $15,000 to different individuals without triggering gift tax consequences. Married couples can each give $15,000. If you combine gifts with your spouse you can gift up to $30,000 per person. Also, you can make unlimited gifts by paying tuition and medical expenses directly.
MAJOR LIFE CHANGES
If you’ve had any life changing events, you should notify your accountant and financial advisor as soon as possible, including:
- Marriage, divorce or death
- Birth or adoption of a child
- Large realized capital gains (i.e. sale of real estate, securities, etc.)
- Changes in employment or health
- Inheritance
- Any anticipated changes for next year
These are just a few tax considerations. Your financial advisor and/or accountant can comprehensively review your income and offer advice tailored to your specific situation.
Stay safe and healthy,
Michael Fuhr, CFP®
Evergreen Wealth Services
This article is not intended as investment, tax or legal advice. Please consult investment, tax or legal professionals for specific information regarding your individual situation and the consequences of any opinions and suggestions offered.
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