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Year-end tax tips for 2020

Under the CARES Act, if you or your spouse or dependent is diagnosed with COVID-19, or is economically harmed by a business closure or quarantine, you can take up to $100,000 from your retirement plan in 2020 without incurring the 10% early distribution penalty. Additionally, the income from this distribution may be taxed over a period of three years. The money from the withdrawals may also be put back into a qualified retirement plan at any time during the three-year period to avoid the taxable income.

The Cares Act eased some tax deduction limits on charitable giving for 2020. Cash donations to charities other than a supporting organization or a Donor-Advised Fund are deductible up to 100% of adjusted gross income (AGI) in 2020. Gifts of appreciated property are deductible up to 30% of AGI.

Be sure to get acknowledgment letters from the charity for both cash and property donations over $250.

You can deduct medical expenses that exceed 7.5% of your AGI if you itemize.  I’ve had clients who thought just receiving a medical bill during that year would enable them to deduct the bill on their return. Medical expenses must be paid in the year incurred to be able to deduct them.  However, credit card payments are deductible in the year they are charged, rather than paid. Prepayment of medical services in advance of the year the services are performed may not accelerate the deduction. The medical deduction threshold will probably be increased from 7.5% to 10% of AGI for 2021.

Donate appreciated stock to charity to avoid paying capital gains tax for stocks held for more than one year.

It’s better to sell depreciated stock and donate the cash proceeds to charity. If you donate this stock to a charity you will lose the benefit of the stock loss. As an example, if you bought stock for $5,000 and sell it for $2,000, you will be able to donate the $2,000 proceeds and take claim a loss of $3,000. If you donate the stock you will be able to claim the $2,000 deduction. However, you will lose the tax benefit of the $3,000 loss.

Gifting appreciated stock to relatives (such as children or grandchildren) in a lower income tax bracket may result in them paying no tax on long-term capital gains when the stock is sold.

Cash gifts in 2020 can help you avoid the estate tax in later years. Gifts of up to $15,000 to each person are exempt from tax ($30,000 from a couple married couple)

You may want to consider keeping stock for at least 12 months since short-term capital gains are taxed at ordinary income rates.

Selling stock that results in losses can offset capital gains recognized during the year.

If you have a business that uses the cash method of accounting, you can delay billing and collections until next year.  You can accelerate expenses by paying business expenses before the end of the year.

David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of four tax books, is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at david@yourtaxcare.com.