Your year-end tax preparation checklist

Understanding annual taxes can be complicated in even the simplest, most status-quo of years. While 2020 has been anything but, and with two major tax law changes in the past year, it’s important this year to really understand and pay attention to your taxes. The two changes from this year are the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Understanding the impact of these changes now can help you as you review and potentially modify your 2020 tax filing.

Making the most of your taxes not only helps you in the short run, but is also top of mind when it comes to retirement planning, as over a quarter (26%) of people say that taxes taking a big chunk of their retirement funds is one of the greatest risks to their retirement income, according to our Retirement Risk Readiness Study.

So as you look ahead to your 2020 tax filing, here is an initial checklist to get you started thinking about any potential changes to make now before year-end. It’s important to work with a tax advisor to understand whether any of these opportunities make sense for your specific financial situation.

Take advantage of low tax rates

Tax rates are currently at the lowest that many have ever seen. And with a possible tax hike after 2025, it might make sense to take advantage of things like a Roth IRA conversion, Roth 401(k) or using leftover funds due to lower rates to help fund financial products like an annuity or life insurance.

Understanding and making the most of tax deductions

The Tax Cuts and Jobs Act (TCJA) doubled the 2020 standard deduction for both individuals and married taxpayers, plus more for those 65 or older or blind. In addition, the child tax credit increased until 2026. There are many additional changes to specific itemized deductions under the new law, but some of the big ones to consider are:

Ways to reduce your taxable income

There are also several key ways you can reduce your taxable income as you review your entire tax situation with your tax advisor. For those 70½ or older, qualified charitable distributions from IRAs up to $100,000 annually are tax free.

In addition, the combination of higher standard deduction and changes to itemized deductions mean many more people will be using the standard deduction instead of itemizing. People who are close to the itemization threshold could consider bunching medical itemized deductions or other itemized deductions like charitable gifts.

Make the most of gift and estate tax exemptions

The TCJA significantly increased the gift and estate tax exemption, which sits at $11.58 million in 2020, and is applied to gift and estate taxes combined. Note that whatever exemption you use for gifting will reduce the amount you can use for the estate tax.

Several relevant strategies include making an annual exclusion gift, implementing generations-skipping transfers, and being sure to complete the IRS Form 706 in a timely fashion in the event of a spouse’s death.

Closing the books on 2020

While many of us are ready to put 2020 behind us, there is still plenty of time to revise your tax strategy to take advantage of some of these strategic opportunities. Working with a tax advisor, you can review this more in-depth checklist, and use it as a starting point to consider any potential changes to your 2020 tax filing.