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Individual Tax Planning Strategies for 2020

Here are a few individual tax planning strategies to consider as 2020 comes to a close.

Tax planning strategies

Take Advantage of the Generous Standard Deduction Allowance

For 2020, the standard deduction amounts are $12,400 for singles and those who are married filing separate status, $24,800 for married filing jointly, and $18,650 for heads of households.

If your total annual itemized deductions for 2020 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction to lower this year’s tax bill. Next year, you can claim the standard deduction, which will increase to account for inflation.

Traditional IRA Contributions for All

The SECURE Act removed the age restriction on making traditional IRA contributions. Individuals over the age of 70 ½ who are still working in 2020 are no longer prohibited from contributing to a traditional IRA.

However, if you’re over 70 ½ and considering making a charitable donation directly from your IRA (known as a Qualified Charitable Distribution or QCD) in the future, making a deductible IRA contribution will affect your ability to exclude future QCDs from your income.

Carefully Manage Investment Gains and Losses in Taxable Accounts

If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2020 is only 15% for most people, although it can reach as high as 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) can also apply.

You can use tax-loss harvesting as a strategy to reduce your tax liability by offsetting capital gains in your investment portfolio with capital losses. You do this by selling securities in your portfolio that are in a loss position to offset the capital gains you have already recognized.

It may be advantageous to buy back those securities sold at a loss at a later date in certain situations. There is a limitation to this practice in order for those losses to be allowed by the IRS. This limitation is called the wash-sale rule.

The wash-sale rule was created by the IRS to prevent taxpayers from creating losses using investments. The rule requires that a loss on a sale will not be permitted if the same or a substantially identical security is purchased within 30 days of the transaction that resulted in the loss. That means 30 days before or after the sale.

Convert Traditional IRAs into Roth Accounts

Now might be the perfect time to make that Roth conversion you’ve been considering. The current tax rates are still relatively low compared to a couple of years ago, and while they are scheduled to remain that way until 2026, depending on the results of next week’s election, they could increase much sooner. Also, your income may be lower in 2020 due to the financial fallout of COVID-19.

Since the CARES Act suspended Required Minimum Distributions (RMDs) for 2020, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be a perfect move. No RMD for 2020 also means that 100% of the distribution can be classified as a rollover.

More to Come

As we mentioned earlier, let’s not forget that there is an election next week. While we don’t anticipate significant tax law changes if President Trump is re-elected, a victory by Joe Biden would certainly lead to Tax Reform (with potentially higher tax rates). As always, we’re paying close attention to the ever-changing tax environment to discover new tax planning strategies for our clients.

If you need assistance with your individual tax planning strategy, we can help. Please email us at or call 443-320-4101.

Author: Megan O’Donnell

This entry was posted on Thursday, October 29th, 2020 at 11:07 am. Both comments and pings are currently closed.

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