Those earning over $400,000 (single and joint filers) and those with income over $1M, likely breathed a collective sigh of relief when it became apparent that the Democrats likely would not take the Senate. This means that Biden won't be able to jam through his "tax plan".
Even though the political situation remains a bit murky, there are some year-end planning items you may wish to consider:
Retirement Accounts
-Max out your retirement account. If you have deductible IRA, 401k, or a 529 plan and haven't yet maxed out the contributions, consider doing so. You will get a deduction for IRA and 401(k) contributions on your federal return and possibly a deduction for a 529 plan contribution on your state return. Note that if you have non-deductible or Roth IRA/401(k) plans, then this will not apply.
-Make a Roth conversion. With Biden likely ascending to the presidency, tax rates likely won't go down further from where they currently are. Thus, you may want to pay more taxes at these historically-low rates. One way of doing that is to convert some of your pre-tax IRA/401(k) funds to a Roth plan. You will increase your 2020 income and taxes, but you may be paying lower taxes now than higher taxes in the future on those dollars.
Charitable Contributions
-$300 above-the-line deduction for cash contributions. As part of one of the stimulus bills during the pandemic, you are now able to take a $300 deduction for a cash-only (i.e. cash, check, credit card) contributions to eligible charities. In other words, even for those who normally do not itemize and instead take the standard deduction, you will still be able to benefit from this deduction.
-Donor advised funds. If you are charitably-inclined, then you may want to consider making a donation to a donor advised fund. The mechanics behind this would be to make a large contribution in one year and reap the related tax deductions (for itemizers only), and have the fund disburse the funds over time. Many people make a contribution for multiple years in one year and itemize, don't contribute the following and take the standard, and then contribute again in the third year and itemize. This strategy is for those who would only itemize in years in which they make the contributions.
-Donate appreciated securities. Aside from reaping the aforementioned $300 deduction for cash-only contributions, it is much more tax efficient to donate appreciated stocks and other securities instead of cash. The reasoning behind this is that you won't be subject to the tax on the gain from the security and you also receive a full deduction (for those who itemize) for the fair market value of the security. Compare this to if you sell the security, pay the tax on the gain, and then donate cash. By donating the security directly, you avoid the capital gains tax.
-No AGI cap on contributions. Normally, you are only able to take charitable contribution deductions up to a certain percentage of your income. However, one of 2020's stimulus bills did away with this requirement for 2020. You will now be able to deduct up to 100% of your AGI. In other words, if your AGI is $120,000 and you contribute $130,000, you will be able to deduct $120,000 instead of $60,000 (or less).
Prepay Expenses
-Prepay tuition. If you have a tuition payment in early-2021 and haven't had any in 2020, prepay it so that you can yield some credits on your 2020 return. Undergrads can get a credit up to $2,500 and graduates and professionals can get up to $2,000. Note that the latter can only take a credit for 20% of their expenses. Thus, professional must pay $10,000 to get the full $2,000 credit.
-Prepay real estate taxes. If you expect to itemize deductions in 2020, then you should consider prepaying your real estate taxes if you have not yet paid up to the $10,000 cap. Note that due to the cap, there is no benefit to paying more than $10,000.
Odds & Ends
-Tax loss harvest. If you currently have net taxable gains and some unrealized losses in your portfolio, then you should consider selling some of the losses in order to offset your gains. You can then buy a very similar security (i.e. a similar ETF or a different stock in the same industry) and not be subject to the wash sale rule. Note that you can use $3,000 of net losses to offset your ordinary income. Beyond that amount, there isn't a tax benefit to realizing losses.
-Estimated taxes. You should consider running a projection of what your tax liability will be in April. If you expect to owe additional taxes, then you will want to consider paying them in advance to offset IRS penalties for late-payment. If you expect to get a refund (read: euphemism for overpayment), then you will want to ensure to not pay any more for 2020. If you scheduled a payment for Q4 on January 15th, you will want to cancel it.
Summary
The items above are a shortlist of what you should consider when reviewing your tax situation this month. However, these are only the tip of the iceberg. You personally may have many other ways to either save on 2020 taxes or set yourself up for a better tax outcome going forward. An experienced tax planner would be able to uncover many of those opportunities.
