Year-End Tax Planning - In General

Here is a quick list of things to do by December 31st:

Beginning 2020, Californians must have health insurance or pay a penalty.  There are a few exemptions.  The FTB has a tool on its web site to estimate the penalty.

If you make regular donations to charity by check or credit card, consider making your January contributions in December.  And, those used electronics, clothes, furniture, books, etc. that you've been meaning to donate to charity must be dropped off by December 31st. (Note: if you give more than $5,000 worth of items, you may be required to have an appraisal.)  Make a list of the items donated, and attach it to the receipt that you receive from the charity.  The Salvation Army publishes a guide to the value of donated items.  And if you would like to donate a car and have the proceeds to go to a local charity, check out Center for Car Donations.

The California College Access Tax Credit is still alive.  Contributions made by December 31, 2020 create a 50% credit on your California tax return.  Only 50% of the contribution is tax-deductible on the federal return.  So, for example, if you contribute $1,000 and are in the 32% federal tax bracket, the credit plus deduction lowers your total taxes by $660.  The contributions are used to fund Cal Grants for low-income students.  You must file a reservation for the credit by 1/4/21.

If you have access to a 401(k) plan, be sure to contribute the maximum, $19,500, before the end of the year.  The limit is increased $6,500 for people age 50 and over.

You can make your January 1st mortgage payment a week early so that the interest deduction falls in this year.  

Parents paying qualified college costs will want to plan to take full advantage of the American Opportunity Credit.  The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000.  Qualifying expenses are tuition, books, supplies, and equipment such as computers and printers.  If you haven't already paid $4,000 this year, you may want to pre-pay some January expenses to take advantage of the full credit.

If you have sold stocks at a profit during the year, see if you can sell losing stocks to offset the gains.  You can deduct up to a $3,000 net loss for the year.  Any loss balance is carried over to future years.  If you sold small business stock, talk to me about qualifying for the Sections 1244 and 1202 treatments.

If you purchase a qualified electric car by 12/31, you may receive a tax credit of up to $7,500.  The date that you take possession of the car is extremely important for determining how much your credit will be.  The IRS provides a list of vehicles that qualify and the credit amounts on its web site.

If you install a solar electric system for your home in 2020 - 2021, you may receive a tax credit of 26% of the cost.  California does not have a similar tax credit, but there are tax-free rebates.

If you have "high-deductible" medical insurance, consider opening a Health Savings Account.  You have until next April 15th to set up and fund the account, so this isn't technically a "year-end" tax planning item.  If you qualify and you usually have significant out-of-pocket medical expenses, you should definitely look at this.

If you've loaned money to someone and will not be repaid, take the necessary steps by 12/31 to ensure that you can claim a bad debt tax deduction.

If you are considering a transfer of real property to family, consider making the transfer prior to February 16, 2021, to retain all or a portion of the Proposition 13 value.

The IRS has expanded eligibility to obtain an Identity Protection PIN.  Now, anyone with a Social Security number can proactively get a PIN.  The IRS web site is here.

The above ideas apply to most people who expect to be in the same tax bracket in 2021 as in 2020.  Additional information for special situations is at:

Year-End Tax Planning if You've Had a Terrible Year

Year-End Tax Planning if You've Had a Great Year

Year-End Tax Planning for Businesses

I wish you and yours a safe and happy new year.