With the arrival of the end of the year, now is the time to consider moves that might minimize your tax liability for 2020. Here are some of them.
Year-end bonus. If you anticipate an increase in taxable income in 2020, and are expecting a bonus at year-end, try to get it before Dec. 31.
Contractual bonuses are different in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file your 2021 tax return in 2022.
Charitable deductions. Bunching charitable deductions every other year is also a good strategy if it enables a taxpayer to get over the higher standard deduction threshold under the Tax Cuts and Jobs Act of 2017 (TCJA). Another option is to put money into a donor-advised fund that enables donors to make a charitable contribution and receive an immediate tax deduction. The fund is managed by a public charity on behalf of the donor, who then recommends how the money is distributed over time.
Under the CARES Act of 2020, this year (2020) eligible individuals may take an above-the-line deduction of up to $300 ($600 married, filing jointly) in cash for charitable contributions made to qualified charitable organizations. Cash contributions are those that are paid with cash, check, electronic fund transfer or payroll deduction. Taxpayers can claim the deduction even if they do not itemize on their 2020 taxes.
Medical expenses. Medical expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). Therefore, you might pay medical bills in whichever year that would do you the most tax good. To deduct medical and dental expenses in 2020, these amounts must exceed 7.5 percent of AGI. By bunching medical expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing the deduction.
Deductible expenses such as medical bills and charitable contributions can be prepaid this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid. Likewise, with checks. For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2020 tax return.
Stock options. If your company grants stock options, you may want to exercise the option or sell stock acquired by exercising an option this year. Use this strategy if you think your tax bracket will be higher in 2020. Generally, exercising this option is a taxable event. The sale of the stock is almost always a taxable event.
Invoices. If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December. However, make sure you keep an eye on estimated tax requirements. Conversely, if you anticipate a lower income next year, consider deferring sending invoices to next year.
Withholding. If you know you have a set amount of income coming in this year that is not covered by withholding taxes, there is still time to increase your withholding before year-end and avoid or reduce any estimated tax penalty that might otherwise be due.
Avoid the penalty by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
This column is for information only and should not be taken as advice. These are just a few of the many tax minimization strategies available. Taxes are complex and mistakes can be costly, so consider having professional assistance for your tax filings.
Norm Grill (N.Grill@GRILL1.com) is managing partner of Grill & Partners LLC (), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.