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With the end of the year approaching, proactive year-end planning can help set you up to succeed in the upcoming year.

Tax strategies

Prepare for the Future With Year-End Tax and Financial Planning Strategies

  • Christopher Schuch
  • Austin Bennett
  • 11/18/2020

Key insights

  • Year-end planning may reveal opportunities to reduce your tax bill.
  • Consider tax savings opportunities such as 1031 exchanges, Qualified Opportunity Zones, tax loss harvesting, and charitable contributions.
  • If you have an employer retirement plan or access to a health savings account, review your investment and savings choices.

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The end of the year symbolically brings an opportunity to both reflect and look forward. Of course, it also brings the tax year to a close and creates a natural planning opportunity. Review the following important items to help end 2020 on a strong note and set yourself up for success in 2021.

Tax savings opportunities depend on individual goals

Success has different meanings for different individuals. Depending on your phase of life and personal financial plan, this could be an opportunity for tax savings, for setting money aside for you or your family’s future, or for making a charitable contribution. The best way to make a plan is to understand your options.

1031 exchange

If you have gains from the sale of income-producing real estate, you may be able to defer the gains and the tax bill through a 1031 exchange. Keep these restrictions in mind:

  • You have to identify a new property within 45 days of the sale of your property and close on the new property within 180 days from the sale.
  • You cannot take possession of the proceeds. The funds need to flow through a qualified intermediary and then into the new deal.

If you don’t want to hold and manage a property, it is possible to buy into a new position through a Delaware Statutory Trust, which also may help with the process of identifying replacement properties.

Investing in a Qualified Opportunity Fund

Capital gains from the sale of any asset can be invested into a Qualified Opportunity Fund, which allows you to defer the gain. The majority of investment has been into real estate development projects in a predefined opportunity zone. If managed correctly, you can defer and potentially reduce capital gains taxes until 2026. Additionally, if you hold the new investment for at least 10 years, there is no tax on the gain from the new investment. Similar to 1031 exchanges, this option isn’t right for everyone but can be an incredibly powerful financial tool for investors who have sizable gains and a long time horizon.

Tax loss harvesting

If an opportunity zone doesn’t fit with your long term personal plan, you may be able to offset capital gains with losses. Tax loss harvesting may allow you to offset some of your current or future capital gains by realizing losses within the portfolio.

Charitable contributions

If you regularly give to charity, consider options to take full advantage of the charitable deduction you receive. With the standard deduction higher than ever and the reduction of certain itemized deductions, gift stacking (funding multiple years of charitable gifts in one year) has become an opportunity to utilize the tax benefit. This can easily be done using a donor advised fund.

While required minimum distributions (RMD) are waived for 2020, you may want to establish a plan to fund charitable giving directly from your IRA to meet your RMD and therefore reduce your taxable income in future years.

Retirement and HSA contribution strategies

If you have an employer retirement plan or access to a health savings account (HSA), now is a great time to review your investment and savings choices. Access to a retirement plan is a major driver of wealth creation. An HSA can help to fund your retirement needs in the future as well. It is important to understand your options and take advantage of the strategies available to set yourself up for long-term financial success.

  • Maximize the contributions to both your retirement plan and HSA to the extent that you can. If you are unable to contribute the IRS maximum for a given year, contribute enough to maximize your employer’s matching contributions (if offered).
  • When reviewing your retirement contributions, evaluate whether the tax benefits of a traditional, or pre-tax, contribution today are more beneficial than the future benefits of making an after-tax/Roth contribution.
  • If your employer does not offer a retirement plan, take advantage of an IRA or Roth IRA to the extent that you can.
  • Evaluate the opportunity for a Roth conversion. Given that many households will have lower income this year, it may be an ideal time to convert IRA dollars at a lower tax rate and allow those funds to grow tax free.
  • HSAs can provide future benefits if you are able to contribute to them annually and defer withdrawals. Current tax law doesn’t require you to take medical expenses out within a certain time frame. Those dollars can be invested and withdrawn in retirement. Just make sure to save your receipts!

How we can help

There may be opportunities prior to the end of the calendar year to reduce your tax bill. Making good choices at year end can be an important way to set yourself up for long-term financial success.

We can work with you to reduce the impact of taxes on your income and investments and get the most out of your deductions. CLA’s tax and wealth advisory professionals can help identify strategies suited to your personal situation.

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