Take Advantage of These Year-End Tax Planning Strategies (Part 3)

October 14, 2020
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Last week on the Illumination Wealth Blog, we shared some helpful year-end tax planning strategies for individuals, families and business owners who have suffered a significant loss of income in 2020 due to the effects of the coronavirus economy. If that describes you, we encourage you to check out Part 1 of this article. If your income stayed roughly the same, then check out Part 2. In Part 3, we are going to focus on people who have been more fortunate this year.

What if My Income Went Up This Year?

If your income has gone up significantly in 2020, these year-end tax tips are for you. Some businesses and investors have been able to do quite well in this economy. If you have earned more money this year, you can benefit from smart tax planning. There are strategic moves you can make before the year comes to an end to reduce your tax liabilities and increase any returns you are due from the IRS and your state.

Here are some tax tips for those who have seen their business grow or individual wages increase significantly in 2020:

Maximize IRA Contributions—Retirement account contributions to 401k plans, defined benefit plans or Traditional IRAs are pre-tax deductions which reduce your taxable income while you are in high tax brackets. Now is the time to contribute extra if you can in order to lower your taxable income and boost your retirement savings.

Conversion to ROTH IRA—Depending on your tax bracket, you may want to consider converting some amount of your tax-deferred retirement savings into a ROTH IRA. This is based on an assumption that tax rates will be higher in future years.

Sell Inherited Property—If you have inherited property from a deceased family member, this financial asset receives a step-up in basis that helps minimize your capital gains tax liabilities. Selling the property before the end of the year could benefit your tax situation.

Donate to a Donor-Advised Fund—A donor advised fund (DAF) allows donors to make charitable contributions while receiving an immediate tax deduction. You then have the opportunity as a donor to recommend grants from the charitable fund.

Establish and Contribute to an HSA—If you don’t have one already and have ongoing medical needs, now is a great time to set up a Health Savings Account (HSA) that will shelter the money you use for health care from your taxable income.

Employ Family Members—If you own a business, employing your family members (especially minors) can be beneficial to your tax situation as you will shift income from your high tax brackets to your children’s lower income tax brackets.

Use the Like-Kind IRC 1031 Exchange—If you own investment or commercial property and don’t know what a “like-kind” IRC 1031 exchange is, it’s time to brush up. We don’t know how much longer they will be allowed, so now is the time to take advantage while you still can.

Use IRC 179 and Bonus Depreciation—These are special tax deductions when purchasing property that will enable you to take a large non-cash expense to reduce your marginal tax rates.

Establish and Contribute to a CLAT—A Charitable Lead Annuity Trust (CLAT) allows you to both make a meaningful donation that gets gifted over time providing you an upfront tax deduction as well as get assets out of your estate to reduce future estate taxes.

Gift Appreciated Stock—If you have a stock or mutual fund that has a large gain, you can gift it to a charity and avoid paying capital gains as well as getting a tax deduction on the value of the securities donated.

Invest in Municipal Bonds—Buying municipal bonds produce non-taxable interest income. They key to your investment plan is to generate the highest after-tax return possible.

Perform a Cost Segregation Study—If you have purchased a rental property recently, consider having a cost segregation study done. This can produce significant tax savings and recoup your down payment!

Invest in a Qualified Opportunity Fund—If you have sold stocks, mutual funds or real estate that have resulted in significant capital gains, consider investing in a QOF to increase your tax savings.

Give Gifts to Your Heirs—You are eligible to give up to $15,000 as a tax-free gift to your family members. If you have the money to spare, you can give them an annual gift so that they have less tax liabilities when the entirety of your estate is transferred.

These are just some of the smart year-end tax planning strategies you can consider if your income has gone up in 2020 and you wish to reduce your tax liabilities. In Part 3 next week, we will provide tips for those whose incomes have stayed roughly the same this year.

If you need help with your personal or business tax planning and overall financial plan, contact Illumination Wealth today to schedule a no-obligation consultation.