Year-End Tax Planning - Good Year

It's been a good year

Tax planning in a good year has the same idea restated in several variations:  Sock money away for your retirement, education and medical costs, donate to charity, and transfer assets to lower-taxed family members.

However, this year may be a time to accelerate capital gains into 2020 if you feel that the capital gain tax rates may increase next year for high-earning taxpayers.

Be sure you contribute the maximum to your 401(k), including a catch-up contribution if you are at least 50 years old.

If you qualify, contribute the maximum to your Roth IRA, and your spouse's Roth IRA.  If you don't qualify, consider funding a non-deductible traditional IRA and then converting it to a Roth.  See my Roth IRA Conversions page for more information. 

If you've had a really terrific year, you may want to make a large charitable donation.  But giving the gift all in one lump has some drawbacks.  Consider using a donor-advised fund, such as Fidelity's Charitable Gift Fund.  You can transfer as much as you want to the fund, and receive a tax deduction now for the whole amount now (within certain limits based on your income).  Then later, even much later, you can decide which charities receive how much and when. 

Instead of cash, you can donate appreciated stock .  If you have held the stock for more than one year, you receive a tax deduction for the fair market value, and escape tax on the gain.  There is a limit on this deduction based on your income.  Be sure to contribute early to be sure the donation is processed by December 31st.

If you would rather keep the assets in the family, the annual gift tax exclusion is $15,000 per donee for 2020.  Or $30,000 per donee if spouses elect gift-splitting.  Gifts above this amount require a little gift tax return, but no gift tax is payable until your lifetime gifts reach the millions of dollars. Consider gifts which have increased in value to push the gains to lower-taxed individuals. If you give a gift by check, either use a cashier's check or make sure your recipient cashes the check no later than December 31st.  Payments directly to colleges for educational expenses and payments directly to doctors and hospitals for medical expenses do not count toward the $15,000 exclusion.

And for large estates, you may want to take advantage of the current $11.58 million lifetime gift exclusion before the end of 2020.  It could be greatly reduced.

Consider funding a Section 529 college savings account.  Contributions to 529 plans are not tax-deductible, but they move assets out of your taxable interest- and dividend-producing accounts.  You can put money into 529 plans not just for your children, but also for people of any age, whether or not they are family.  Also, withdrawals may now be made to pay for elementary education.

And finally, if you've had a great year, be sure to prepay enough tax to avoid penalties.  You may want to boost your withholdings from now until December 31st, or make a prepayment as soon as possible.

You may also want to look at these pages:

Year-End Tax Planning in General

Year-End Tax Planning for Businesses

Bess Kane, CPA