• David Hilliard

Tax Planning for 2020

As a tax advisor, my most rewarding feeling is when the plan I develop for a client is implemented and followed.  The client does not stress every year wondering if they will have to write a huge check to the treasury and they are comforted that they ethically paid the least amount of tax. I am happy because I am helping set that client on a path to preserve as much wealth as they can for them and their heirs.  This outcome rarely simply falls into your lap, it requires planning.  And I have a secret for you, you are likely not getting a complete plan while you have your return prepared.  At best you are getting some great tips and general advice that, if you implement, will help for next year.  In California, you are probably paying an effective rate between 25% and 40%.  That is a big chunk of your wealth to give up.  So, let’s stop procrastinating and talk about how you keep more of what you earn.

In general, every tax plan starts with something called AGI, or Adjusted Gross Income.  This is the pebble in the pond.  It affects many thresholds, limitations, and is the basis on how you calculate your taxable income.  The tax planning game begins with controlling your AGI.  

5 ways to control AGI

1. Maximize your contributions to your 401k.

If you are still working you can contribute up to $19,500, or $26,000 if you are over 50, into your 401k plan.  


2. Contribute to an IRA

In 2020, the IRA contribution limits are $6,000 with an additional $1000 catch-up for those over 50.  IRA contributions can be deducted from your adjusted gross income and can be made by April 15th of the following year.  Be careful, your income may phase out the deductibility.  New for 2020, the age limit has been removed, so if you are over 70.5 you can contribute if you are earning taxable compensation.

3. Qualified Charitable Distributions (QCD’s).


If you are over 70.5, QCD’s are made directly from your IRA and satisfy your required minimum distribution and are excluded from taxable income.  Not only does this reduce your AGI but it allows those of you taking the standard deduction to take advantage of your contributions.

4. Take advantage of the 2020 RMD waiver

The Required Minimum Distributions from your IRA has been waived for 2020.  Obviously, this can reduce your income for the year substantially. Consider making ROTH conversions instead since your income will be low.  

5. ROTH Conversions

A Roth Conversion moves money from a traditional IRA to a Roth IRA.  Income is realized in the year it is converted, but you have the benefit of tax-free growth from that point.  If you think your tax bracket will increase in the future, Roth conversions are a tool to take advantage of that low bracket.

3 Traps to avoid

1. Income-related monthly adjustment amount (IRMAA)

Keep an eye on an increasing AGI.  Breaking the income thresholds will increase the amount you will pay for your Medicare premiums. This is a hidden tax as it does not appear on your tax return and comes into effect 2 years after the tax year.


2. Net Investment Income Tax (NIIT)

NIIT is a 3.8% tax on investment income that comes into play when your AGI reaches over $200,000 for a single person.  Most taxpayers will see this after selling their long-term rental properties.  Always consult your tax advisor before making transactions involving large capital gains.

3. Paycheck Protection Program (PPP) Loans

These loans were intended to help businesses keep employees paid during the stay at home orders of early 2020.  Depending on how the funds were used they may be wholly or partly forgivable and the forgiven loans are not taxable income to you.  However, as of the writing of this article, the IRS has stated that expenses paid with the forgiven loans are not deductible.  This may unexpectedly increase the AGI of business owners.

Tax planning is not an afterthought. Depending on your situation we recommend having a 3 to 5-year outlook for proper planning.  If you fall into any of these categories, you should be taking advantage of yearly planning.

  • All business owners

  • Individuals considering retirement in 3 - 5 years

  • Individuals that will be taking social security or Medicare in 5 years

  • Selling real estate or highly appreciated stock


For more information or to schedule a tax planning appointment contact our office.


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