Select Page

For most, tax planning becomes a focal point at the end of the year, if it happens at all. The most effective tax planning starts before the next tax year. Meaning, 2021 tax planning usually begins in the last quarter of 2020. That said, the three tax planning strategies below can be executed before year-end as part of your 2020 tax return.

Bunching Your Deductions

Before the TCJA, nearly 30 percent of tax filers itemized deductions. In 2019, it was estimated that only 13 percent of filers would itemize. The primary driver for the reduction in itemized deductions is the increase of the standard deduction. For individuals, it rose from $6,350 to $12,000. For those married filing jointly, the standard deduction increased from $12,700 to $24,000.

The TCJA capped several deductions. Included was the deduction for home mortgage interest and state and local taxes (SALT). Most filers will wait until their taxes are due to determine the more significant benefit, taking the standard deduction or itemizing. Whether you’re a life long itemizer or you always take the standard deduction, you may benefit from “bunching.”

Bunching arises when a taxpayer claims a deduction for a subsequent year, in the current year. You’ll often see this with expenses and deductions like; medical expenses, property taxes, SALT, and charitable deductions. Below are two examples.

Property Taxes

Property tax bills are generally sent to homeowners in December with a payment due date in January. For 2018, you paid your $5,000 tax bill in January of 2019. In December of 2019, you again received your tax bill of $5,000.

Option 1 – Pay your 2019 tax bill in January of 2020.

Option 2 – Pay the 2019 tax bill in December of 2019. Because you paid the 2018 bill in January and the 2019 bill in December of the same year, you will be able to “bunch” the payments and claim the full $10,000 deduction.

Charitable Contributions

Each year, you donate $12,000 to the charity of your choice. For simplicity, you donate the same amount monthly. You decide to ‘bunch’ next year’s contributions with the $12,000 you already contributed. So, instead of monthly donations throughout the coming year, you will donate $12,000 in December of this year for the ensuing year. Due to bunching, you can write-off $24,000 in charitable donations this year. 

Without the bunching strategy, you would have claimed the standard deduction in 2018 and 2019. By utilizing the bunching strategy, your deductions were greater than the standard deduction in 2018, so you itemized and took advantage of the larger deduction. Then in 2019, you take the standard deduction. The net effect was a reduced tax bill compared to taking the standard deduction in both years.

NOTE: The CARES Act provides a new charitable deduction available to individual taxpayers that do not itemize. The “universal deduction” allows an above-the-line deduction of up to $300. The donation must be a cash donation.

Tax-Loss Harvesting

Tax-loss harvesting is a common strategy in non-retirement accounts. You sell securities at a loss to realize a short- or long-term capital loss. The realized losses may be used to offset capital gains and/or up-to $3,000 of earned income.  There are numerous reasons to consider tax-loss harvesting; below is just one example.

Todd sold a property in February and invested $500,000 in his brokerage account. In October, his dream home came on the market. He sold half of his brokerage account for a down payment. The sale of the assets generated a $40,000 short-term capital gain, taxed as ordinary income.  In a 32 percent tax bracket, the sale could add over $12,000 to his tax bill. In December, the stock market fell, and he noticed he had unrealized losses of $27,000. He sold the positions to realize the short-term loss. Netting his losses against his gains, he expects to reduce his tax bill from over $12,000 to just over $4,000.

Consider a Roth Conversion

This year, I’ve spent a considerable amount of time discussing Roth conversions, back-door Roth contributions, and the mega-backdoor Roth. Under the current tax law, tax rates are not scheduled to increase until 2025. Depending on your future income, your tax situation, and where you expect tax rates to be in the future, a conversion may be a year-end strategy to consider. Remember to discuss a Roth conversion with your tax professional. The option to recharacterize or undo the conversion is no longer permitted. 

Please click here for important disclaimers