TAXING MATTERS
T . MARK RUSH , CPA
Partner Ham , Langston & Brezina , LLP
5 Year-End Tax-Planning Strategies to Implement Now
Proper year-end tax planning has always been
important , get started by using these five tax tips to potentially increase tax savings ( and minimize the federal income tax ) for 2020 .
1 . Evaluate 2019 IRA contributions and trust beneficiary documentation
Anyone making an excess contribution to an IRA for 2019 has the option to remove it , plus the net income attributable , by October 15 , 2020 avoiding the 6 % excess contribution penalty . One can also recharacterize any IRA or Roth IRA contribution by October 15 for any reason — even if it is an allowable contribution and not an excess . However , it is important to remember that Roth IRA conversions cannot be recharacterized . Regarding beneficiaries , if an IRA owner or retirement plan participant named a trust as beneficiary and died in 2019 , it is important that the trustee provide required documentation to either the IRA custodian or the plan administrator .
2 . Take advantage of coronavirus-related distributions and waived RMDs in 2020
Under the CARES Act , individuals under 59½ who are “ qualified individuals ” can withdraw up to $ 100,000 of coronavirus-related distributions ( CRDs ) from IRAs and / or company plans if needed . The best part is that CRDs are not subject to the 10 % early distribution penalty , and there is the option to spread the taxable income over a threeyear period . The CARES Act also waived 2020 RMDs . The waiver applies to RMDs from IRAs , company plans , inherited IRAs , inherited Roth IRAs , and plan beneficiaries . If RMDs were already taken , they can be repaid if they are otherwise eligible for rollover .
3 . Consider a qualified charitable distribution and above-the-line charitable deduction
Before year end , anyone inclined to make charitable
contributions might want to consider the benefits of making such donation using qualified charitable distributions , or QCDs ( many people make their charitable gifts in December ). QCDs remain a great tax break for charitably inclined individual as IRA owners who are at least age 70½ are eligible to transfer up to $ 100,000 to charity directly from their IRA . QCDs can help to offset RMDs and can still be made to lower taxable income ( even though RMDs are waived for 2020 ). In addition , per the CARES Act , individuals can benefit from the $ 300 above-the-line charitable deduction for the 2020 tax year . 4 . Perform Roth conversions before December 31 If an individual has been hesitant on converting traditional IRAs or pretax 401 ( k ) funds to Roth accounts , this may be the perfect time to finally take the leap . Even though they will be paying taxes on the conversion now , we are in a low tax environment and it is unlikely that taxes will ever be this low again , particularly if there is a “ blue wave .” In addition , 2020 taxable income for individuals could be lower than in the past because of lost income from the pandemic as well as waived RMD ’ s . In addition , there is a one-time opportunity to convert what would have been RMD income since RMDs in a normal year cannot be converted prior to December 31 .
5 . Use estate planning strategies to reduce estate taxes
For individuals the IRS allows a $ 15,000 maximum for annual exclusion gifts per recipient . These gifts can be made to anyone each year and they do not reduce the gift / estate exemption . These annual exclusion gifts are always tax-free — even if the exemption is used up . In addition , there are unlimited gifts for direct payments for tuition and medical expenses .
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