SEE ALSO >> Individual Tax
2021 is right around the corner, but there’s still time to cut your 2020 tax bill. Here are seven last-minute tax strategies to consider at the end of this tumultuous year:
1. Donate to charity. Generally, itemizers can deduct cash contributions to qualified charities, subject to an annual limit. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the limit is 100% of adjusted gross income (AGI), increased from 60%, for donations made by December 31, 2020 — even if you contribute online and pay later. Note: Nonitemizers can deduct up to $300 of cash contributions.
2. Harvest capital losses. If you have losses in your portfolio, consider whether to sell before year-end. You may use capital losses to offset your capital gains — plus up to $3,000 of higher-taxed ordinary income. Any excess is carried over to next year. Conversely, depending on your situation, you might realize capital gains to absorb prior losses. Note: Long-term capital gains generally receive preferential tax treatment.
3. Boost 401(k) contributions. By adding to your 401(k) plan, you can feather your retirement nest egg while lowering your current tax bill. For 2020, you can defer up to $19,500 of pay on a pre-tax basis ($26,000 if you’re age 50 or older).
4. Schedule doctor and dentist appointments. For 2020, you can deduct unreimbursed medical expenses above 7.5% of AGI, but this threshold is scheduled to increase to 10% in 2021. If you’re at or over the threshold this year, consider arranging eye doctor and dentist visits in December. Note: The deduction isn’t available for cosmetic expenses.
5. Pay next semester’s tuition. Typically, parents of college students can claim a higher education credit or a tuition deduction, subject to a phaseout based on modified adjusted gross income (MAGI). If you qualify, you might pay next semester’s tuition in December to reduce your 2020 taxes.
6. Adjust income tax withholding. Be aware you may owe interest and penalties — on top of regular income tax — if you don’t pay enough tax in 2020 through any combination of withholding and quarterly installments.
7. Make an emergency IRA withdrawal. If you’re short on funds due to the COVID-19 pandemic, you might want to tap your IRA. Generally, IRA withdrawals before age 59½ are subject to a 10% tax penalty, on top of regular income tax, but the CARES Act creates a penalty exception for COVID-19–related withdrawals of up to $100,000 in 2020. Note: This reduces your retirement savings, so consider it carefully.
More tax strategies may be available. Your Belfint advisor can clue you into the best approaches for your specific situation.