Year End Money Moves Amid COVID

In most years, writing a year-end post is a snap, but 2020 is not most years. Here are a bunch of year-end money moves to consider, some are COVID-related, while others are tried and true.

Think about 2021 Taxes NOW: The IRS is not likely to extend tax deadlines again in 2021 and therefore, start figuring out where you stand right now. If you received an economic stimulus check (EIP), it is NOT taxable. But if you collected unemployment benefits, either through your state or through CARES Act programs, those dollars ARE taxable. If you did not have taxes withheld from your unemployment checks, you will need to pony up some moolah to Uncle Sam in April.

For those who haven’t withheld, and for everyone else too, use the IRS’s withholding estimator to see if you have had enough money set aside to pay your tax bill in April. If you are employed, notify your payroll department to increase your withholding through the end of the year. If you are not working or are self-employed, you may want to make an estimated tax payment to reduce or eliminate potential tax penalties.

Calculate Remote Work Tax Implications: As of October, more than one in five workers teleworked because of the pandemic, and many have done so outside of their city or state of residence. If you fall into this category, understand that there could be tax benefits, or penalties, for the change in location.

The American Institute of Certified Public Accountants (AICPA) recommends remote workers compile the number of days worked in any states, cities, counties, municipalities, school districts or other jurisdictions you’ve worked remotely in during 2020. Then check your primary state’s rules about other jurisdictions and make the adjustments to tax withholding that are needed.

Be Careful with the Home Office Deduction: I know what you are thinking: I worked from home and therefore I can deduct some portion of my mortgage/rent, utilities, and insurance. NOT SO FAST! The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the employee business expense deduction through December 31, 2025. 

However, if you are self-employed, then the home office deduction is still available. According to the IRS, there are two basic requirements for the taxpayer's home to qualify as a deduction: (1) There must be exclusive use of a portion of the home for conducting business on a regular basis and (2) The home must be the taxpayer's principal place of business.

Evaluate Outstanding Student Loans: The CARES Act provided a lifeline to the nation’s millions of federal student loan borrowers, by suspending loan payments, dropping interest rates to zero percent, and halting collections on defaulted loans through September. In August, the timeline was extended until December 31, 2020. (Most private lenders matched the government’s plan, but you should speak to those institutions directly to understand their forbearance rules.)

Currently, there is no extension to the federal program, which means you should analyze your outstanding loans and prepare to re-start your payments in 2021. Federal Student Aid and your servicer will contact you ahead of time to nudge you about this, so make sure your contact information is up to date in your account profile to ensure a smooth transition back to paying down the loans.

If you are lucky enough to have a job and your cash flow allows, get a jump on your loan balances. Until the end of 2020, the full amount of your payments will be applied to principal once all the interest that accrued prior to March 13 is paid. Paying some of the loans now could shorten the term of the loan.

Consider a Roth Contribution or a Roth Conversion: For decades, the idea behind retirement planning was simple: save money by deferring taxation today, because years later, when you retire, your tax bracket will be lower. The idea has now been turned on its head, because currently, federal income tax brackets are about as low they have ever been. That means that it could be better to pay taxes now instead of in the future, when rates could be higher.

That thesis is the argument for making a Roth IRA contribution for 2020, rather than using a traditional IRA. The limit for 2020 and 2021 is the lesser of $6,000 or your total earned income for the year, with an additional $1,000 catch up contribution available if you are over age 50. One note: you can’t count unemployment benefits as earned income when determining how much you can contribute to either a Traditional or a Roth IRA.

If you have lower income this year, it could be an ideal time to convert from a traditional IRA into a Roth. A conversion may allow you to pay the taxes due at today’s a lower rate than you might find yourself in the future. Start by checking out the IRS tax brackets, because the amount you convert adds to your taxable income. Then make sure you have non-retirement funds available to pay the tax due. Once you convert to a Roth, your money will grow tax-free and when you retire and withdraw the money, there will be no tax due. Because Roth plans are not subject to Required Minimum Distributions (RMDs), many retirees use them to help control their future taxation of Social Security benefits and/or increased costs of Medicare, which are income tested.

Don’t Worry About RMDs: The CARES Act eliminated RMDs from retirement plans (including beneficiary accounts) for calendar year 2020, so there should not be any last minute, end of year freak-outs. That said, if you did not have to take the RMD money for financial reasons, your taxable income will be lower for 2020, which means that you might consider realizing capital gains in a taxable investment account, which will allow you to take advantage of lower rates. If you are married filing jointly and your income is less than $80,000 ($40,000 for singles), the capital gains tax rate is ZERO.

Finally, last year’s SECURE Act increased the RMD age from 70 1/2 to 72. If you turned 72 in 2020 or are turning 72 in 2021, you may want to establish an automatic transfer of your RMD, or at least set a calendar reminder to take it at some point in 2021. Roth IRAs do not require withdrawals until after the death of the owner.

Slash Your Tax Bill with Uncle Sam’s Help: The best way to reduce your tax liability is to maximize your retirement plan contributions before the end of the year. Most employer plans allow you to increase your contribution percentages, but be sure to readjust after the New Year. If you are self-employed or earn money as a gig worker, consider establishing your own retirement plan. For most, using either a Traditional or Roth IRA will do the job.

Rebalance Thoughtfully: If you itemize and have a taxable investment account, you can sell investments with losses to offset gains during the year. If you have more losses than gains, you can deduct up to $3,000 against ordinary income; and if you have more than $3,000, you can carry over that amount to future years.