12 year-end tax moves to make, or at least look into, in November 2020
Sunday, November 01, 2020
It's November, a month most of us welcome because of its cooler temperatures and annual holiday festivities.
However, there's even more to think about in November 2020. The presidential election is just a few days away. Then there's the coronavirus pandemic, which means Thanksgiving plans for most of us are modified if not scrapped.
If you find you're staying home this year as a health precaution, don't despair. Remember that it's for everyone's good. And there's always Facetime or Zoom if your family is large and really socially distanced.
On the tax side, a stay-home holiday means you'll have more time to get started on year-end tax moves. Here are 10 tax matters to consider and, wherever applicable, complete this November.
1. Vote.
OK, this technically isn't a tax move. But as we're constantly told, elections have consequences.
That includes tax consequences.
If you haven't already voted early and your presidential choice is affected by how much you shell out to the Internal Revenue Service every year, check out Donald J. Trump's and Joe Biden's tax proposals before you head to your polling place.
And don't forget about the tax-related ballot measures in several states.
2. Consider crossover tax effects.
At this time of year, your focus obviously is on ways to reduce your 2020 tax bill. But with 2021 looming, you also should look at what moves you make in the next two months might do to your 2021 taxes, too.
The best of both tax worlds is to reduce your taxes in both years.
So dust off your crystal ball and look at what your income is so far, what it will be by the end of this year (including any investment year-end payouts and gig work) and what you expect it to be in 2021 (more, less or about the same). Then can check out which tax brackets into which your 2020 earnings and expected 2021 income will fall. That will give you an idea of whether you need to defer current taxable income or accelerate write-offs into 2021 or vice versa.
3. Compare itemized vs. standard deduction options.
Your two-year tax analysis also should help you determine whether you should itemize or claim the standard deduction in one or both years.
For the 2020 tax year, the standard deduction is $12,400 for single filers and twice that for married couples filing jointly. Next year, the single taxpayer standard deduction goes to $12,550. Married couple in 2021 will get a standard deduction of $25,100.
If, however, you can write off more by filing a Schedule A, then do so. That means you'll need to make the most of allowable expenses. Mortgage interest remains fully deductible, so you make your January 2021 payment before the end of the year and claim it on your 2020 return. Tally your medical expenses. If you've spent a lot on health care this year — a lot means more than 7.5 percent of your adjusted gross income — or will by Dec. 31, think about getting and paying for elective medical procedures this year to bump up this deduction.
Also look into bunching as much health-related costs (an extra pair of prescription contact lenses, medicine that can be refilled now instead of waiting until 2021) that can help you bulk up your medical itemized deduction for 2020. Then by pulling these costs into this tax year, you can claim the standard deduction in 2021.
4. Fine tune your Form W-4.
By now, you should have a good idea of what your final 2020 earnings will be. If it looks like you might be getting a refund when you file next year, consider changing your withholding now. That way for the final pay periods of 2020, you'll get more of your hard-earned money in your pay rather than some of it being held for months by Uncle Sam.
You can use the IRS' updated withholding calculator to do a paycheck checkup. And if turns out that you need to have more withheld, making the change in November will spread out the added tax bit over several paychecks so that you don't have to come up with a big payment when you file next year.
5. Don't forget about unemployment. If, however, you were laid off due to your company's COVID-19 closure and got unemployment, remember that those government payments are taxable income. You should have been making estimated tax payments to cover those taxes. The final one for the 2020 tax year is due on Jan. 15, 2021. Look at ways now to come up with this required tax money so that you don't end up owning more in late- or non-payment penalties and interest.
6. Spend down your FSA.
You might not have a lot of deductible out-of-pocket health care costs to worry about because you pay them with your tax-favored medical flexible spending account (FSA). These workplace accounts offer a great way to set aside pre-tax dollars you can spend on medical expenses that aren't covered by your insurance. But they have one big drawback. Many still require you to use up all of your FSA money by the end of the benefits year, which is Dec. 31 for most companies, or you'll lose them.
Some companies give FSA owners a grace period until March 15 to use the money. Others allow a rollover of at least some of the accounts' funds. But your best bet is to spend down your FSA completely — there ever are some COVID-19 treatments the account could cover — to ensure that it's not wasted. Making those decisions in November can help you avoid panic FSA spending at the end of the year.
7. Be charitable.
During the traditional gift-giving season, many folks make giving to charities part of their holiday celebrations. In addition to making you feel good, such contributions are still deductible under the new tax law. In fact, a recent COVID-19 law change allows for cash donations of up to $300 to be claimed without itemizing.
The most common ways of giving to an IRS-approved nonprofit is the cash method. This includes writing a check or charging your donation to your credit card.
You also can donate clothing or household items and deduct the value of your old property. And there are some other creative ways to give, such as donating appreciated stock that no longer fits into your overall investing plan.
8. If you're older, give more.
Many older folks dread birthdays for tax reasons. When they hit their 70s, they have to start taking out, and paying tax on, some of their tax-deferred savings. But they got good news this year. These required minimum distributions, or RMDs, were pushed in the Coronavirus Aid, Relief and Economic Security (CARES) Act from age 70½ to 72. Plus, RMDs in 2020 were waived.
But 70½ is still the effective age if you want to donate your RMD. Once you hit that half birthday, you can transfer as much as $100,000 a year from an IRA directly to qualified charities. This qualified charitable distribution is nontaxable and reduces your eventually taxable amount of retirement money. Just be sure the transfer is made directly to your chosen charity. If it comes to you, even if you then hand the money over to the nonprofit, it will count as taxable income for the year.
9. Make tax-favored gifts to family.
Charity also can begin at home. The annual gift tax exclusion provides a great way for people of means to give to those close to them in the context of reducing a potential estate tax down the road. Under this tax provision, you can give a sizable amount — it's $15,000 per person in 2020 and the same in 2021 — each tax year without paying gift tax or tapping your lifetime estate and gift tax exemption.
Your spouse can also give $15,000 to the same donee. That's a $30,000 tax-free gift for wealthy couples. If you don't use the gift tax exclusion in a tax year, it's gone forever. So if you've got it, share it while you're still around to get the thanks and hugs.
10. Feather your nest eggs.
It's great that you're such a generous parent or grandparent. But don't overlook your own financial and tax needs. Add as much as you can to your retirement accounts by year's end. This is a perennial suggestion, as far too many taxpayers fail to make the most of their 401(k)s and other retirement savings options.
Yes, you do have until next April 15 to make IRA contributions, either traditional or Roth, for the 2020 tax year. But the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred or tax-free. And if your traditional IRA is deductible, a contribution will reduce your taxable income for this year.
When it comes to workplace retirement plans, Dec. 31 is the last day you can put money for the current tax year into your 401(k) or similar plan. So get to your benefits office ASAP to bump up your contributions for the final few pay periods of 2020. This post on inflation adjustments for retirement plans has specifics on how much you can put into your nest eggs this year (or next, if you're into planning ahead).
11. Harvest your investment tax losses.
The stock market has been crazy this year, due in large part, of course, to the coronavirus. If your holdings were hard hit, they still could provide some tax benefits. As part of your overall annual asset analysis, you might decide to sell some of those losing assets. This stock loss harvesting can offset any gains, and yes that's possible even in a year like 2020, you made on other holdings.
Capital losses also could be especially beneficial to higher income taxpayers facing the 3.8 percent Net Investment Income Tax (NIIT). This surtax, part of the Affordable Care Act, is still in the tax code. It applies to the unearned income, not adjusted for inflation, of single or head of household filers with modified adjusted gross incomes (MAGIs) of more than $200,000 and married joint filers earning $250,000 (or $125,000 if married and filing separately). Harvesting losses can help high earners reduce their NIIT amount.
And if in taking those losses you discover you have more of them than gains, you can claim up to $3,000 in bad investments against your ordinary income to help lower that taxable amount. Then get a new financial adviser!
12. Collect your cryptocurrency documents.
You'll need this paper trail if you buy, sell or mine cryptocurrency. It will provide an accurate record of what you owe on Bitcoin and its digital brethren. Don't ignore this. The IRS is serious about tracking these investments.
For years, it's been increasing its efforts to get the taxes it says are due on the virtual funds. That continues with the 2020 tax year Form 1040, where the IRS comes out and asks right at top whether you have acquired an interest in virtual currency.
To avoid upping the IRS' literal not virtual ire, start collecting all the info related to your cryptocurrency activity now. If you don't have complete and correct records of your transactions, you could be subject to added attention from the IRS and possibly face a bigger tax bill that you expected.
More November tax moves: Yes, that's a lot to think about amid holiday plans and coping with coronavirus challenges. Still, it could be worthwhile to at least look into some of these moves this November.
That's why these 12 tax moves are this week's By the Numbers figure.
If any or all of them apply to your financial and tax situations, take advantage of them. They could make a valuable difference to your tax liability.
You also can, if you're a tax glutton, peruse the ol' blog's right column for a few more November Tax Moves. They're under the heading like show at left, just below the countdown clock ticking off the time left here in tax year 2020.
Once all this tax stuff is done, you still have time to work on your Turkey Day and beyond holiday celebrations. And you'll be able to do without that nagging tax voice in your head.
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