Income Tax Mitigation • Charitable Gifts • Personal Gifts • Workplace Benefits

The following information has been updated for 2020 and 2021.

Many of us cannot wait for 2020 to be over. It has brought too many unpleasant surprises – from the coronavirus pandemic, to protests across the globe, to not being able to live “normally,” and finally a historic presidential election.  Although circumstances have not been easy, our focus remains on the things we can control – and there are a number of simple and smart actions you can take between now and the end of the year (and beyond).

Income Tax Mitigation

By this time of the year, you should have a good idea of your total household income for the year, as well as anticipated expenses (property tax, insurance dues, holiday gifts and donations, etc.).  A possible extra income item this year for many workers is unemployment insurance and the Pandemic Unemployment Assistance (PUA) authorized in the CARES Act.

Regular unemployment benefits and PUA have provided a much-needed safety net during the coronavirus pandemic, especially for self-employed, freelance, and part-time workers.  These benefits are considered taxable income and must be reported on your federal and state income tax returns.  Tax withholding on them is voluntary, which could lead to a sizable tax surprise in next April.  Consider having your taxes taken out from these weekly benefits, or setting aside roughly 10% for federal income tax.  Oregonians are recommended to have a 6% state income tax withholding¹ (Washington does not have state income tax).

If your work situation is stable and household expenses are predictable, maximize retirement savings by looking at your cash flow situation.  Then find ways to make a contribution into a retirement-savings vehicle, be it your 401(k) or an individual retirement account (IRA).  IRA contributions can be made up to the tax-filing day (April 15), but 401(k) deferrals must go into your plan account by the end of the calendar year for them to count towards 2020.  Limits on those contributions are $6,000 ($7,000 for taxpayers 50 and above) and $19,500 ($26,000 for participants 50 and above) for IRA and 401(k), respectively.  These limits will remain the same for 2021.

For those covered by high-deductible health plan (HDHP), you can contribute tax-free into your health savings account (HSA) with no income phaseouts.  The limit (including amount from your employer) is $3,550 for single taxpayers and $7,100 for families.  Limits will increase to $3,600 (single) and $7,200 (family) in 2021.  There is also a $1,000 catch-up for primary plan owners 55 and above. Distributions used on qualified medical expenses are tax free.

Flexible spending account (FSA) owners need to take a look at their account balances now.  Any unused funds will be forfeited at the end of the year.  If your FSA has a large balance, consider changing next year’s contribution amount.  For ideas on how to spend down your FSA, read 42 Ways to Spend FSA Cash Before the Year-End Deadline.

Charitable Gifts

In general, there are two ways to be charitable: giving assets and giving time.  This year (2020) is especially “tax-friendly” for cash donors, thanks to the CARES Act.

• If you do not itemize (the case for most taxpayers), you can deduct up to $300 from your income on cash donations made a public charity.  For more details, check out this Kiplinger article.
• If you do itemize (roughly 1 out of 10 tax returns), the 60% deduction limit against adjusted gross income (AGI) is suspended and you are able to deduct up to your entire AGI.  In a simplified example, if your AGI in 2020 is $50,000 and you write a check for that amount to the American Red Cross, your taxable income would be $0.  If you are in a position to be philanthropic, this unprecedented benefit may not be available in the future!

Here are some other general charitable donation guidelines.

• For gifts under $500 – cash donations are effective for smaller gifts. Some of these don’t get acknowledged by the receiving charitable organizations.  A good example is the Salvation Army red kettles outside a supermarket during the holiday season.  Be sure to keep the receipts and a list of used items donated to Goodwill for tax purposes.
• For gifts $500 and above – we won’t stop you from giving cash if that is what you want to do. Some charities are set up to only accept cash or checks anyway. But if your favorite ones can – and most do – accept securities such as stocks, you should take a look at your investment portfolio and see which route may be better for you.  Giving appreciated stock is very tax effective because you avoid realizing capital gains and paying tax on them while doing good!

Available only to IRA owners who are over 70½, the $100,000 tax-free qualified charitable donations (QCDs) can reduce your required minimum distribution (RMD) amount while lowering taxable income, dollar for dollar and up to the limit (Note: RMD for 2020 is waived). More and more taxpayers are taking advantage of this!  However, it’s important that you follow the rules in order for the donation not to be recognized as income.  Also, if you take your RMD (receiving a check from your IRA and cashing it) before doing a QCD, the donation will still be tax-free but it will not reduce your RMD amount.  In other words, if your goal is to minimize a taxable RMD, be sure to process QCDs first.

Personal Gifts

Instead of cash, sometimes it may be wise to give appreciated investments to family members, particularly those with little or no income. Tax on long-term capital gains is omitted (0%) for married couples with taxable income up to $80,000 (singles $40,000).  (Note: short-term gains are taxed as ordinary income and it’s a bad idea to gift stocks with losses).  Gifts under $15,000 do not have to be reported to the IRS and gift recipients do not incur gift tax either.

Workplace Benefits

Now is also an excellent time to re-evaluate your employment benefits and make adjustments if necessary.  Many companies are currently accepting changes during their annual open enrollment period, usually ending in mid-November.  A few of the common ones include:

• Group health plans – if you have big plans in mind for the upcoming year, it’s wise to align the benefits available to your needs.
• Group life insurance – is generally cheaper than individual policies and doesn’t require a medical exam.
• ESPP, or Employee Stock Purchase Plan – allows employees who work for a publicly-traded company to buy the company stock at a discount (typically 15%).
• Company discounts and wellness programs – it pays to read through your employee benefits packet for discounts that can help improve your wealth and health!

If there are any particular items, whether covered in this blog post or not, you would like to discuss, do not hesitate to let us know.

Footnote:
¹https://www.oregon.gov/newsroom/Pages/NewsDetail.aspx?newsid=37189