End of Year (EOY) Deadlines Checklist
2020 has been one of the most unprecedented years in recent history, but some things—like tax contributions and retirement deadlines—don't change much, if at all. And with the uncertainty surrounding just about everything, meeting these deadlines and getting tax efficiencies in place now may help the rest of the year run more smoothly. Read on for several things you'll want to accomplish before 2020 draws to a close.
Establish or Contribute to a Keogh Plan or Solo 401(k)
A Keogh plan, or a tax-deferred pension plan that's available to unincorporated businesses or the self-employed, allows contributions of up to $57,000 per year—far more than the $19,500 that can be contributed to a traditional 401(k).1 But to take advantage of these tax savings in 2021, the taxpayer must establish (and contribute to) a Keogh plan by December 31, 2020.
Take Required Minimum Distributions (RMDs)
Anyone with an IRA, 401(k), 403(b), 457, Simple IRA, or SEP IRA must begin withdrawing from these accounts at some point. These withdrawals, which are computed using the applicant's age, life expectancy, and the total balance of the account, are known as RMDs, and are subject to income tax.
The SECURE Act boosted the RMD age from 70.5 to 72. But because the penalty for failing to take an RMD (or for taking a distribution that's too small) can be a 50 percent excise tax, missing this deadline can be an expensive mistake.2 As for the 2020 year, the CARES Act waived RMDs for IRAs and retirement plans, including beneficiaries with inherited accounts5. The waiver was also extended to individuals who turned age 70 ½ in 2019 and took their first RMD in 2020.
Pay Expenses for Itemized Deductions
If you're likely to deduct more than the $24,400 standard deduction (for married couples) or $12,200 (for single filers), itemizing your deductions can make sense.3 But in order to itemize, you'll need to actually spend this money in 2020. Some of the expenses that can be itemized include home mortgage interest, property, state, and local income taxes, medical expenses, charitable contributions, and investment interest expenses.
Make Tax-Deductible Charitable Contributions and Annual Tax-Free Gift
Generally, taxpayers can deduct charitable contributions so long as these contributions are made in cash and don't exceed 60 percent of the taxpayer's adjusted gross income (AGI). However, certain "qualified" contributions can be deducted up to 100 percent of the taxpayer's AGI.4 Like other 2020 tax deductions and credits, these contributions must be made during the 2020 calendar year in order to be deductible.
The end of the year can be a good time to take stock of your holdings and rebalance them if necessary. You may find that the rise in certain sectors (like tech) and decline in others (like energy) has skewed your asset allocation; selling certain over performing holdings and reinvesting these proceeds according to your desired asset allocation can help bring your portfolio back into line. Before selling stock (and potentially incurring capital gains in the process), you may want to sketch out a rough draft of your federal income tax return to see whether your proposed stock sale will be enough to potentially move you into a higher tax bracket.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Asset allocation does not ensure a profit or protect against a loss.