Take Advantage of These Year-End Tax Planning Strategies (Part 2)

October 21, 2020
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The past two weeks on the Illumination Wealth Blog, we have been talking about some year-end tax planning tips. These are strategies used by savvy individuals, families, investors and business owners who are looking to reduce their overall tax liabilities for 2020 and maximize their tax returns. The more you understand tax laws and regulations that directly affect you—along with any specific tax credits, deductions and loopholes—the less the IRS and your state will take away from your annual income.

Depending on your financial situation this year, you may want to check out the other two articles in this series first. Part 1 focuses on people who had a significantly lower income in 2020, likely due to the coronavirus wreaking havoc on our overall economy. Part 3 addresses year-end tax planning strategies for those who actually made more money this year.

Read Part 1

Read Part 3

What if I Made the Same Income as Last Year?

Then, there are people who are in the other boat. You basically made about the same money this year as you did in 2019. This probably describes a lot of workers who were able to retain their jobs and keep getting by with the same income. However, there weren’t a lot of raises and bonuses handed out as many companies streamlined and adapted to different ways of operating.

Though your income may have stayed roughly the same in 2020, there may still be plenty of tax laws and credits that you aren’t taking advantage of yet. The CARES Act offered some new tax benefits to help stimulate economic recovery, though they mostly are designed to help businesses who took out PPP loans and received other forms of financial aid. That might not describe your business if you were able to keep things more or less status quo this year. Still, there may be some existing strategies that you overlooked in previous years and there are always certain year-end tax moves you can make.

Here are some tax tips for those who have seen their business income or personal income stay more or less the same in 2020:

Review Your Withholdings—Now is the time to review your tax withholdings and see if it’s a good idea to withhold a little more on your final few paychecks or throughout 2021. If you are worried about owing taxes at the end of the year or want to maximize your return, then your withholdings are a smart place to start.

Adjust Your Final Estimated Tax Payment—If you own a business or do work as an independent contractor, your final quarterly estimated tax payment will be due on January 15, 2021. Some small business owners wait and pay a lump sum for the whole year at this time. Look at your tax return (or what you still owed) from last year. If you made roughly the same amount this year, then adjust your final payment as needed to cover your liabilities. If you think you’ll owe again, add more to your estimated payment if you can. If you got a lot of money back last year, then you can reduce or maybe even skip your final estimated tax payment.

Convert Some Retirement Account Funds to ROTH IRA—If you have a 401k or other retirement account, you may consider converting some of those tax-deferred funds into a ROTH IRA. There’s a good chance tax rates will be higher in future years, so a ROTH IRA likely gives you more tax benefits in the long run.

Use IRC 179 and Bonus Depreciation—These are specific tax deductions that business owners can utilize. IRC 179 allows the depreciation of certain property and assets used for business to be deducted.

Hire Family Members—Small business owners can get significant tax benefits when they employ family members (especially minors).

Establish and Contribute to an HSA—If you and/or any of your dependents have recurring medical expenses because of an existing condition (including any prescription drugs you take), you will want to consider establishing a Health Savings Account (HSA). This is a tax-deferred account that you can use specifically for medical expenses. It will reduce your taxable income for the year and save you more money over time, as long as you use what’s in the account.

PPP Loan Forgiveness—If you did take out a PPP loan in 2020 to help your business get by, do everything you need to do to maximize forgiveness. You shouldn’t end up owing anything if you used the funds properly and followed all the regulations.

Perform a Cost Segregation Study—If you have purchased rental real estate recently, consider having a cost segregation study done. This can offer significant tax savings!

Invest in a Qualified Opportunity Fund (QOF)—If you have sold stocks, mutual fund or real estate that have resulted in significant tax liabilities, consider investing in a qualified opportunity fund to maximize your tax savings.


These are just a few year-end tax planning strategies that many workers, investors and business owners can utilize in 2020. Most of these tips apply every year, while a few are more specific to 2020. In the end, you did pretty well this year if you were able to maintain a similar income as last year. It’s not exciting to drive in neutral, but this year has put all of us to the test in many different ways. We all have to make the best of it.

For all your tax planning needs and other wealth management services, contact Illumination Wealth today to schedule a no-obligation personal consultation with one of our top financial advisors.