News & Insights

Fairport’s Five Year-End Tax Planning Tips

By Fairport Wealth

Maximize Your Retirement Savings

As the year comes to a close, there is still time left to maximize your retirement savings. You can contribute up to $19,500 to a 401(k) or other qualified plan in 2020, plus $6,500 in catch-up contributions if you are age 50 or older. Everyone with an employer plan that offers a match should at least contribute the amount required to get the maximum match. Not fully utilizing this employer benefit is essentially passing on free money.

If you have a HSA qualified health insurance plan, one way to lower your taxes is to contribute the maximum allowed in your HSA ($3,550 for individual coverage or $7,100 for family, plus $1,000 in catch-up contributions if you are age 55 or older). HSA contributions can be deducted through payroll, but you can also make contributions directly to ensure the maximum is made. In addition to providing a tax deduction, HSA dollars carry over indefinitely and are yours even if you switch jobs or retire.

Adjust Your Income Tax Withholding 

If you have not had enough money withheld from your paycheck, you may be able to take steps between now and year-end to avoid an April surprise. In general, you don’t have to worry about an underpayment penalty if you owe less than $1,000 after subtracting withholdings and credits, or if you paid at least 90% of the tax due for the current year or 100% of taxes due the previous year (110% if your Adjusted Gross Income is greater than $150,000), whichever is smaller.

If you find that your tax payments throughout the year are coming up short, reach out to your human resources department to request an increase to the withholdings from your remaining 2020 paychecks or year-end bonus to make up the difference. After you catch up, you can complete and submit a new Form W-4 to make your withholding more even throughout the year.

Take Advantage of Charitable Contributions

Donating appreciated stock to a charity is one of the most effective tax strategies, and if made to a donor advised fund, it allows you to bunch deductions in years that you itemize. Contributing to a donor-advised fund allows you to deduct the entire contribution in the year you make it and decide later how you want to dole out grants to qualified charities of your choice.

Taxpayers who are 70½ or older can transfer up to $100,000 from a traditional IRA tax-free to charity each year. Usually, the distribution counts as part of your Required Minimum Distribution (RMD). That’s not an issue this year, because the CARES Act waived RMDs for 2020. But if you are planning to give to charity anyway, a “qualified charitable distribution” will reduce the size of your IRA, which will reduce your future required withdrawals and your tax bill.

Consider a Roth Conversion

Consider converting some money from a traditional IRA to a Roth IRA this year, up to the top end of your income tax bracket. You will pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free. With the potential that tax rates may increase in the future, Roth IRAs become even more attractive.

If you are age 72 or older, there is another compelling reason to consider a Roth conversion this year. Ordinarily, you cannot convert money in a traditional IRA to a Roth until you have taken your RMD. With those waived for 2020, you can now convert as little or as much as you want without worrying about a taxable RMD.

Utilize Annual Gifting

If you are looking for ways to gift your wealth while reducing your estate tax exposure, don’t forget that you can give up to $15,000 to as many beneficiaries as you would like each year without paying a gift tax or decreasing your lifetime estate tax exclusion amount. There are no annual limits for direct medical and tuition gifts.

Contributing to a 529 college savings plan before year-end won’t reduce your Federal tax bill, but it could lower your state taxes. In most states, you must contribute to your own state’s plan to get the tax deduction. Many states allow grandparents and others to contribute to your child’s plan too.

Understanding your entire financial picture and what matters to you is important in uncovering and implementing strategies such as these. If you’re currently a Fairport Wealth client and would like to discuss these opportunities, please contact your team. If you’re not yet a client and would like to discuss how we may be able to help you with implementing these and many other financial planning strategies, please contact us at (216) 431-3000 or email us by clicking here.