2020 Individual Year-End Tax Planning Tips

Year-end planning for 2020 takes place with the backdrop of a global pandemic that has impacted so many individuals. This is a brief overview of many year-end saving strategies that you can use when planning for the end of 2020.

Consider a Health Savings Account (HAS)

HAS’s allow you to pay for certain medical expenses on a pretax basis. If you meet certain requirements for 2020, your HAS contribution can be up to $7,100 for family coverage and $3,550 for single coverage (plus an additional $1,000 if you’re 55 or older) and can be made regardless of your income level. These contributions are 100% tax deductible above-the-line, so you benefit even if you don’t itemize or are subject to high-income itemized deduction phase outs. You can then take tax-free withdrawals to pay uninsured medical expenses. A provision of the CARES Act now allows withdrawals to be made tax-free to pay for the cost of over the counter medications, retroactive to January 1 of this year. Withdrawals not used for medical expenses are taxable an if not taken before age 65 are subject to a 20% penalty tax. After age 65, withdrawals are taxed as ordinary income. In the meantime, they can build tax-free. It is also important to note that 2020 deductible HAS contributions can be contributed until April 15, 2021.

Charitable Giving with a Donor-Advised Fund

As a result of the New Law, it might be beneficial to consider managing your charitable giving with a Donor Advised Fund (DAF).

With a DAF you establish a private account with an organization that sponsors donor-advised funds. The organization itself is a public charity, such as a community foundation, a university, or perhaps the charitable arm of a brokerage or mutual fund company. You then contribute cash or other assets to your account, which is invested so it may grow overtime. Because the sponsoring organization is a public charity, you can take an immediate tax deduction for the cash and assets you contribute, even before a single grant is made. When you are ready to make grants, you simply advise the sponsoring organization of your choices. Although the sponsoring organization has legal control over your account and the authority to decline your grant recommendations, it will generally follow them as long as they adhere to the organization’s guidelines. You can donate all of the funds in your account quickly, or you can space out your grants over time. The flexibility to make tax-deductible contributions now yet award the grants later can be very attractive in certain situations. Let’s say for instance, that you want to make a charitable gift by the end of the year for tax reasons, but you do not have enough time to choose the charities you want to benefit from your gift. A DAF allows you the time to make thoughtful choices while meeting your immediate financial goal of tax deduction. Or let’s say that you want to establish a tradition of giving in your family. A DAF provides the structure to invest your gift and make grants on an ongoing basis, perhaps involving members of your family in the selection of grant recipients.

Tax Benefits of a Donor-Advised Fund (DAF)

Using a DAF offers several tax advantages.

• You can claim a charitable deduction for the contributions you make to your DAF.

•Contributions of appreciated stock or other assets that you held for longer than one year avoid capital gains tax and can generally be deducted at their fair market value. 

• Your contributions can grow tax-free within a DAF account, potentially increasing the amount available to support your favorite charities and causes.

As with charitable gifts in general, you must itemize deductions on your tax return to claim deduction for your contributions. Keep in mind that the deduction for charitable contributions is subject to limits based on your adjusted gross income (AGI). The limits, however, are more generous for contributing to a DAF than to a private non-operating foundation. As a result, donations to a DAF may result in a larger tax deduction.

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This is intended to give you just a few ideas to get you thinking about planning for 2020. Copper Leaf Financial develops a customized wealth management (financial) plan designed to integrate every aspect of your financial life. This is "true wealth management" - a holistic approach that goes beyond just investment advice. Our affiliated full service CPA firm, Davis & Hodgdon Associates, enables us to tightly integrate individual and business owner’s wealth management with comprehensive tax advice so that all recommendations can factor in the tax consequences. Call us today at (802) 878-2731 to schedule a strategy session and begin building your road map to financial success.