Year End Tax Planning: Moves to Consider Before 2020 Comes to a Close
Authored by Shannon Eusey, CEO and Commie Stevens, Chief Strategist Officer of Beacon Pointe Advisors

End-of-year tax planning is more difficult this year than normal, given we do not yet know if next year will bring changes to tax laws. Even if the Democrats gain both of Georgia’s Senate seats in the January runoff election, to push through tax legislation, they would need to push the legislation through with budget reconciliation or some other method requiring just 51 votes, including Vice President-Elect Harris’ vote.

As we do know this year’s tax rates, if you are planning on making certain tax moves early next year regardless of whether tax laws change, it may be wise to make those moves before year-end to lock-in this year’s potentially more preferential tax rates.  For example, if you are planning on making a charitable donation of $100,000, this year the deduction could be $37,000, but next year the deduction could drop to $28,000 if the Democrats have the votes in the Senate to push through their tax policy.  We have summarized key 2020 tax rates and Democratic proposed policy considerations towards the end of this letter.

Here are portfolio-related year-end tax planning tips to consider with your tax professional and advisor.

Harvest Losses from Your Taxable Accounts Selling securities for a loss (“harvesting” losses) can reduce your tax bill now and in the future.  Even if you have held the securities for less than a year, losses from the sale of securities can shelter short-term and long-term capital gains realized this year from income tax, and any unused losses can reduce up to $3,000 of ordinary income.  You can carry any losses unused this year forward to cut your future tax bills.  Note though, that you cannot deduct a loss on a security when a virtually identical one is purchased within 30 days of the original sale, as this is considered a wash sale. Check-in with your financial advisor to see if there are prudent loss opportunities in your portfolio.

Maximize IRA and Retirement Plan Contributions Be sure to fund your retirement account to the applicable limit: the IRA funding limit for 2020 is $6,000 ($7,000 if over age 50), and the elective salary deferral limit to 401(k), 403(b), and 457 plans is $19,500 ($26,000 if over age 50). If you are a business owner, consider contributing to a SEP IRA or establishing and contributing to a Solo 401(k) by year-end. The contribution limit for SEP IRAs and profit-sharing/401(k) plans for business owners is 20% or 25% of compensation (depending on the business entity) up to a maximum of $57,000 for 2020. If you are a high-income taxpayer, deferring income might be important if doing so brings your income below the highest income and capital gains tax rates and might allow the 20% QBI deduction on business income.

Consider a Qualified Charitable Distribution Required Minimum Distributions (“RMDs”) from your Traditional IRAs, employer-sponsored plans, and inherited IRAs are not required this year due to the CARES Act that was passed in March 2020. If you choose to be charitable and are over age 70½, you could donate up to $100,000 from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization) to both satisfy your charitable goals and prevent the distribution from being included in your taxable income.  Making a direct donation from your IRA might lower your income and allow you to qualify for lower Medicare premiums and other income tax breaks.  Also, note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD.

Convert Your Traditional IRA to a Roth IRA If you believe your tax rate might be higher in the future because of either greater expected income or higher tax rates, consider converting your Traditional IRA to a Roth IRA.  A Roth IRA is attractive to those expecting higher taxes in the future because, unlike distributions from a Traditional IRA, qualified withdrawals from a Roth IRA are income tax-free.  It might be a good year to do a Roth conversion, given RMDs are not required, so you could choose to convert the amount you would have taken as a distribution without throwing off your tax planning. A conversion might also help to reduce your taxes over time since reducing the value in your Traditional IRA will reduce future RMDs, which might lower your future tax bracket.  There is no free lunch, of course, as you will have to pay income tax on the amount you convert.  The conversion typically makes sense if one or more of the following apply: (1) you have monies outside of your IRA to pay the income tax on the conversion, (2) you believe you will be in a higher income tax bracket later, (3) you are not planning on using the converted funds for several years to allow for tax-free compounding, or (4) you plan on leaving your IRA or Roth IRA to your heirs.  Note that if you decide to convert to a Roth, you can no longer undo it later (as it used to be), so be sure to check with your tax professional before converting.

Make Annual Exclusion Gifts to Family For families that expect to gift or leave assets to heirs above the exemption amount or want to continue helping family members if you have in the past, consider making annual tax-free gifts to loved ones.  The 2020 annual exclusion allows you to make tax-free transfers of $15,000 per recipient in cash or property without reducing your ability to shield future wealth transfers from tax using lifetime exemption and without having to file a gift tax return.  Consider creative ways to give to your children and grandchildren, like funding college or funding a loved one’s retirement. You might use the annual exclusion gift to fund a tax-advantaged Section 529 college savings plan. Or if your children or grandchildren are working, your gift of cash might fund a Roth IRA to kick-start their retirement savings, compounding growth over a long period and creating tax-free income in retirement. In 2020, your employed children/grandchildren can use $6,000 of your gift to fund a Roth IRA, reduced by any other contributions to an IRA.  To be eligible, your children/grandchildren must have earned at least $6,000 in 2020 and not more than $122,000 (single taxpayer).  Gifting shares of stock or other investments can get them interested in learning about investing. If gifting cash, be sure checks are deposited before year-end to count for your 2020 annual exclusion.

Gift Appreciated Securities to Charity If you plan to donate to charity this year, consider making your donation with appreciated stock or mutual funds you have held for more than one year. If you itemize your deductions, not only would you be able to deduct the full fair market value of the securities (limited to 30% of Adjusted Gross Income [“AGI”] with the excess carried forward for 5 years), you also avoid the capital gains tax you would otherwise pay on the sale of those securities. However, this year you might also consider donating cash since the CARES Act: (1) created a new $300 above the line charitable deduction for certain cash charitable contributions; and (2) temporarily suspended the AGI limitation entirely on certain cash charitable contributions for 2020. Individuals itemizing deductions may deduct up to 100% of AGI for cash contributions in 2020, potentially eliminating most tax liability through charitable donations. A qualified charitable contribution in this regard is a cash contribution made in 2020 to a qualified tax-exempt organization, which does not include supporting organizations or donor-advised funds. If you do not think you will itemize every year, it might make sense to bunch several years of charitable donations into one year using a donor-advised fund. A donor-advised fund allows you to take the income tax deduction this year but direct the fund to make donations to your chosen charities over many years.  Let your advisor know if you would like to gift securities from your accounts, as it takes some time to facilitate the transfer. Be sure to get a receipt and a written acknowledgment from the charity describing the donation and anything you received in exchange for any donations.

Consider Investing in a Qualified Opportunity Zone There is still time to defer large capital gain realized in the last year by investing in a qualified opportunity zone (QOZ) fund. QOZ legislation was established by the Tax Cuts and Jobs Act in 2017 and has since been clarified by IRS Regulations. The law allows (1) Federal tax deferral of capital gain invested in a QOZ until the earlier of when the fund is sold or December 31, 2026, (2) forgiveness of 10% of the capital gain held in the QOZ for five years, and (3) Federal tax avoidance on investment gain on the initial QOZ investment if held for at least 10 years. The capital gain deferred or avoided might still be taxable at the state level. The deadline to reinvest capital gains realized between October 4, 2019 and July 4, 2020 is December 31, 2020. The deadline to reinvest capital gains realized after July 4, 2020, is 180 days after gain recognition. For pass-through entities like S-corporations and LLCs, the deadline to reinvest capital gains realized anytime in 2019 is December 31, 2020. The deadline to reinvest capital gains realized anytime in 2020 is by September 11, 2021. (Entity tax return filing due date of March 15, 2021 plus 180 days). Be sure to confirm deadlines with your CPA.

Key Metrics

2020 Federal Taxable Income Rates

2020 Federal Taxable Income Rates
Democratic Tax Rate Proposals
.  The Democrats propose raising the top marginal tax rate to 39.6% from the current 37%.  They also propose expanding the taxable income range for which the top rate applies to taxable income above $400,000 so that the top marginal tax rate of 39.6% would apply to taxable income over $400,000.  If your taxable income in 2021 is likely to exceed $400,000 and you are planning on converting a portion of your IRA to Roth or taking a distribution from your retirement plans to cover living expenses, you might accelerate those actions into 2020 to lock in this year’s tax rates.

2020 Federal Long-Term Capital Gain Brackets

2020 Federal Long-Term Capital Gain Brackets

Democratic Capital Gain Rates Proposal. The Democrats propose raising the tax on long-term capital gains and qualified dividends to 39.6% to the extent a taxpayer’s taxable income exceeds $1,000,000. If your taxable income in 2021 or 2022 is likely to exceed $1,000,000 and you intend to sell assets with capital gain in 2021 or 2022, you might want to accelerate some of the sales into 2020 to lock in paying tax at the lower capital gains tax rate.

2020 Federal Itemized and Standard Deductions The standard deduction is $12,400 for single filers and $24,800 for joint filers. If your itemized deductions exceed the standard deduction, you will itemize. Key itemized deductions:

  • Up to $10,000 combined for state and local taxes paid (your choice of state income tax, property tax, or sales tax)*;
  • Mortgage interest for home loans up to $750,000; loans taken on or before 12/14/2017 then up to $1M*;
  • Unreimbursed qualified medical expenses in excess of 10% of adjusted gross income; and
  • Charitable donations of cash or goods.
  • Democratic Cap to Itemized Deductions Proposal. The Democrats propose limiting the benefit of higher-income taxpayers’ itemized deductions to 28% of the deduction. If your marginal tax rate exceeds 28% and you expect to make a charitable gift in 2021, you might consider making the charitable gift this year to ensure you get to deduct the full value of the gift versus having the gift deduction being capped at the Democratically proposed 28% cap. If doing so, we recommend making your gift with appreciated assets and potentially to a donor-advised fund for flexibility.

*It’s important to check with your CPA to understand whether your state has conformed to the 2017 Federal tax law. For example, California and New York have not conformed to the Federal law for itemized deductions. They, therefore, still allow a full deduction for property taxes, miscellaneous itemized deductions including investment advisory fees, and mortgage interest on new loans up to $1M.  Investment advisory fees are Federally deductible in calculating the 3.8% net investment income tax on investment income.

2020 Federal Lifetime Gift and Estate Tax Exemptions and Rates

2020 Federal Lifetime Gift and Estate Tax Exemptions and Rates 

Democratic Proposal to Cut the Exemption Against Gift and Estate Tax. Although not specifically included in Biden’s tax proposal on his website, there is strong speculation in the media and professional outlets that should Democrats be able to push through legislation, they would cut the exemption against gift, estate, or Generation-Skipping Tax by 50%.  If in the next few years you intended to make a substantial gift (likely in excess of $8M as a single person or $16M as a couple, depending on prior gifting), you might discuss with your estate attorney accelerating that gift into 2020.

We wish you the best in 2021!

If you are looking for an advisor to help you with your investments or financial planning, please do no hesitate to reach out to us at

This material provides general information only.  Beacon Pointe Advisors does not offer legal or tax advice.  Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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