1. Capital gains and losses: Under current law, investors continue to offset capital gains and losses against each other. As a result, you might realize capital gains from sales of securities to absorb capital losses from earlier in the year or realize losses to offset capital gains plus up to $3,000 of ordinary income in 2020.
The maximum tax rate on long-term capital gain for assets held longer than a year remains at 15% (20% for high-income taxpayers). Also, certain low-income taxpayers (e.g., your children) may benefit from a 0% rate.
2. Charitable donations: If you itemize, you can boost your charitable deduction by giving gifts at year-end. (Special rule: A non-itemizer may claim a $300 deduction for monetary gifts made in 2020.) Under the CARES Act, you can deduct monetary gifts equal to 100% of your adjusted gross income (AGI) in 2020, up from of 60% of AGI.
Furthermore, charitable gifts made by credit card in December are still deductible on your 2020 return, even if you do not pay the credit charge until next year.
3. Medical expenses: An itemizer can deduct unreimbursed medical expenses above an annual threshold. Previously, the limit was 10% of AGI, but the Tax Cuts and Jobs Act (TCJA) passed in 2017 lowered it to 7.5% of AGI. Currently, this lower threshold expires after 2020.
This may be your best chance to qualify for a medical deduction for several years. When it makes sense, accelerate non-emergency expenses, such as medical exams or dental cleanings, from 2021 into 2020.
4. Mortgage interest: The TCJA modified the deduction for mortgage interest expenses by lowering the deduction threshold for acquisition debt from $1 million to $750,000. (Deductions for qualified prior debts are “grandfathered.”) In addition, for 2018 through 2025, the law suspended the deduction available for interest paid on the first $100,000 of home equity debt.
However, if you use a home equity loan to substantially improve a qualified residence, the debt is treated as an acquisition debt. Accordingly, if you take out a home equity loan in 2020 and use the proceeds for home improvements, the interest may be deductible within the usual limits.
5. Required minimum distributions: Normally, if you are age 72 or older (increased from age 70½ by legislation in 2020), you must take annual required minimum distributions (RMDs) from traditional IRAs and qualified plans like a 401(k). Otherwise, you are hit with a 50% tax penalty in addition to regular income tax liability. RMDs are based on life expectancy tables and the balance in your account on December 31 of the prior year.
However, the CARES Act suspends the RMD rules for 2020. Unless you need the money, keep it in your account and continue to benefit from tax-deferred compounding of funds.
6. Installment sales: When you sell real estate or other capital assets, you generally owe the full amount of capital gains tax in the year of the sale. However, you can benefit from installment sale reporting if you receive payments over two or more years. Essentially, you are taxed on a pro-rata basis on the amount received from the sale each year.
Not only do you defer part of the tax, you might lower your overall tax liability. Note: If it suits your purposes (e.g., you are experiencing a low tax year), you can “elect out of” installment sale reporting on your 2020 return.
7. Estimated tax: If you underpay income tax during the year through any combination of withholding and installment payments, you could be liable for an estimated tax penalty. When it is appropriate, make adjustments to qualify for one of two “safe harbor” exceptions.
Generally, you can avoid the penalty by paying at least 90% of your current tax liability or 100% of the prior year’s tax liability (110% if your AGI for 2019 exceeded $150,000). A third safe-harbor rule provides flexibility for workers who earn most of their income during the holiday season.
In summary: These are just seven possibilities to consider. Develop a year-end tax plan for your personal situation.