4. Contribute to Retirement for Potential Sweet Savings
Whether you contribute in a Traditional or Roth IRA, you benefit from tax-advantaged investing. While IRAs allow you to make 2020 contributions until Tax Day, contributing earlier means more time in the market for your dollars to grow. Take note: If you're eligible, you might be able to deduct Traditional IRA contributions.
5. Review RMD Details to Avoid Scary Penalties Next Year
This year brought significant changes for required minimum distributions (RMDs) from IRAs and certain retirement plan accounts. It's a good idea to know what changed and plan for 2021.
The SECURE Act changed the RMD age as follows:
- If you were born on or after 7/1/1949, you aren't required to begin RMDs until you reach age 72.
- If you were born before 7/1/1949, the SECURE Act didn't change your RMD starting age, which remains age 70½.
In March, the CARES Act waived RMDs for 2020, including first-year 2019 RMDs that were due April 1, 2020. If you took an RMD without realizing it was waived, you may be able to return it as a 60-day indirect rollover, but only if it's been within 60 days. Rolling your 2020 RMD back within the 60-day deadline does NOT count towards the IRS restriction of allowing one indirect rollover every 12 months.
Note that the waiver only applies to 2020 RMDs and it may be a good idea to start thinking about your 2021 distribution. That includes making sure you take enough to avoid the 50% tax penalty on any amount of your RMD that you fail to take.
6. Unmask Deductions With 529 Plan Contributions
Unlike IRA contributions, purchases into 529 Education Savings Plans must be made by year-end to take advantage of any state deductions for 2020, if applicable. Anyone—related or not—may be able to take a deduction for contributions to your student's account, depending on their state's tax laws.
7. Assess Education Expenses to Scare Up More
If you have a student in college, you might be able to deduct education-related costs. Review your anticipated income to determine if you want to spend the money now to take advantage of those deductions this year or wait until 2021. You may also be eligible for educational credits , such as the American Opportunity Tax Credit and the Lifetime Learning Credit .
8. Consider Charitable Donations for Treats All Around
Donating your taxable investments presents a win-win situation for the qualified organization of your choice and you. When you donate securities in-kind, you don't pay taxes on the appreciation—and you may also receive a deduction. Refer to the IRS website or talk to your tax advisor for details.
9. Know Gifting Limits to Foil Ghoulish Results
If you're planning to reduce your estate by making gifts to family, take note of the annual exemption . As of 2020, the IRS allows you to give up to $15,000 per person per year without incurring gift taxes. You can still give more than the limit per year to an individual and not incur gift tax, but you must report it and count it towards your lifetime exemption amount ($11.58 million in 2020 ).
Plan Ahead for Less Bubble, Bubble Taxes and Trouble
Looking ahead has its benefits. Early tax planning lets you make money-saving decisions before time runs out. And, the more money you save from taxes, the more you have to invest toward your investment goals.