7 Tried-and-True Year-End Tax Planning Tips by Christopher Taarick, JD, LLM

Posted on December 14, 2020 by Christopher Taarick

As we count down the days to the end of a tumultuous year, there are some strategies you should consider implementing now to potentially reduce your tax liabilities for 2020. Year-end tax planning is equally important for maintaining tax efficiency in the year ahead, which, for 2021, includes a new president and the prospect of tax reform.

Check Withholding and Estimated Tax Payments 

The financial impact of the COVID-19 pandemic has affected everyone differently. No matter what your circumstances, there’s still time before year-end to check your withholding and estimated tax payments to determine if you paid your fair share of taxes during the year. Should there be a shortfall, you may find yourself with a significant tax bill as well as underpayment penalties and interest.

To avoid penalties and interest for tax underpayments, individuals must pay 25 percent of their “required annual payment” for the current year on each of four installment dates (April 15, June 15, September 15 and January 15 of the following year for a calendar-year taxpayer). The required annual payment generally is the lesser of 100 percent of the tax shown on the taxpayer’s return for the preceding year or 90 percent of his or her tax for the current year. However, in figuring 2020 estimated taxes, taxpayers whose 2019 adjusted gross income (AGI) was more than $150,000 must pay the lesser of 110 percent of the tax shown on their 2019 tax return or 90 percent of their 2020 tax liability.

The applicable test is applied separately to each installment payment. Therefore, you may be penalized for the underpayment of estimated taxes if your installment payment of estimated tax plus taxes withheld from your salary (and certain other payments, such as pensions and annuities) do not total at least 25 percent of your required annual payment. You may not make up for an estimated tax underpayment or an underpayment penalty by increasing your estimated tax payment for a later period (although a payment in a later period will reduce the period for which the penalty applies).

One thing you can do is to increase withholding by asking your employer to increase the amount of taxes withheld from your remaining 2020 paychecks, which will retroactively eliminate the underpayment penalties. In all cases, you should work with your CPA or tax accountant to run the numbers for 2020 and remember to consider applying any action you take to your 2021 withholding and estimated tax payments.

Save for Retirement 

If you have the means, there’s still time to supercharge your retirement savings and reap the rewards of a tax deduction when you file your 2020 tax returns in April 2021 and earn tax-deferred growth on your investments.

For 2020, the maximum amount you can contribute to an employer-sponsored 401(k), 403(b) or 457, via salary deferral is $19,500, plus an additional $6,500 if you are age 50 or older. Employees must complete the contribution by the December 31 deadline by asking your employer to increase the amount of salary you defer from your remaining paychecks for this year. While this will reduce your take home pay during the month, it will also reduce your federal tax bill for 2020 and, if your employer offers a 401(k) match, you will get an immediate return on the money you invested.

The maximum contribution limits for IRAs and Roth IRAs in 2020 is $6,000, plus an additional $1,000 if you are age 50 and older. With both types of plans, the 2020 contributions deadline is April 15, 2021.

A discuss about end-of-year retirement savings planning in 2020 would not be complete without mentioning the Coronavirus Aid, Relief and Economic Security Act (CARES Act), for which eligible taxpayers have until Dec. 30, 2020, to take early withdrawals of as much as $100,000 from their retirement plans free of penalties. Repayment rules apply and should be discussed and planned for under the guidance of your tax advisors.

Consider Making a Roth IRA Conversion 

Low asset values combined with low tax rates may make 2020 a good year for converting a traditional IRA into a Roth IRA that allows tax-free distributions during retirement years. Unlike a traditional IRA, which provides tax-deferred future growth, a Roth IRA provides tax-free future growth. While you will have an immediate tax liability on the converted amount, you can ensure tax-free income for yourself and the beneficiaries who inherit your Roth IRA(s) after you pass away.

Give to Charity 

For 2020, all taxpayers are entitled to a tax deduction of up to $300 for cash contributions they make to eligible charities before December 31. In-kind donations of clothing, furniture or other items will not qualify this one-time deduction.

Since 2018 and the passage of the Tax Cuts and Jobs Act (TCJA), the availability of the charitable deduction has been limited to those taxpayers who itemized their deductions. If you fall within this category, you may consider increasing your giving this year to take advantage of relief included in the CARES Act that allows you to write off 100 percent of cash donations you make to nonprofits in 2020. Usually, that deduction is limited to 60 percent of your adjusted gross incomes. Generous taxpayers age 70½ or older also have an opportunity to make a tax-free donation of up to $100,000 directly from their traditional IRAs to an eligible charity.

Harvest Losses to Offset Realized Gains

If you have realized capital gains, you may consider tax-loss harvesting, or selling other positions at a loss to offset those taxable gains and potentially reduce your taxable income for the year. You can then reinvest the sales proceeds into a similar security to maintain your financial goals and investment strategy. However, you must be careful to comply with the IRS’s wash-sale rules and avoid purchasing the same or a “substantially identical” replacement asset within 30 days of disposing of the original asset. Because the tax benefits of this strategy may not outweigh the potential growth of your holdings right now, consult with your financial advisors to carefully weigh all your options.

Estate and Gift Tax Planning

For 2020, individuals may transfer up to $11.58 million in assets to their heirs during life or at death without incurring federal estate or gift taxes. For married couples filing joint tax returns, the federal estate and gift tax exemption for 2020 is $23.6 million. Unfortunately, the current exemption is scheduled to sunset at the end of 2025 and revert back to $5 million (indexed for inflation) and may be reduced sooner based on proposed tax reform from the new presidential administration. As a result, now is a good time the time to remove assets from your taxable estate by gifting wealth to family members before the end of the year.




Take Inventory of Changes to your Life or Circumstances 

If you got married or divorced, changed your name, or moved to a new address in 2020, you should notify both the IRS and the Social Security Administration. In addition, end-of-year is a great time to review your existing estate plans and your named beneficiaries to determine if changes should be considered to meet your current lifestyle, needs, and goals in a changing global environment.

About the Author: Christopher Taarick, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he helps private companies and high-net-worth families develop tax-efficient business and estate plans. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or