Planning is important. End-of-year tax planning is one part of that planning. This year you should also consider whether you’ve had any payroll tax withholdings deferred. If your employer deferred those withholdings, you’ll have more money withheld next year than usual. That means you’ll have less money for other things, like IRA contributions.
As Autumn arrives, it’s not too early to consider end-of-year planning. Fundamental to end-of-year planning is deciding whether to shift income or expenses from this year to the next, to the extent possible.
All other things being equal, typically you’d want to defer income (and the taxation on it) until the following year. However, if your income is lower in the current year, you may want to keep extra income in the current year to be taxed in a lower tax bracket and hence a lower marginal tax rate.
Similarly, typically you’d want to take expenses in the current year rather than deferring them until the following year. However, with expenses you’d need to consider their deductibility in each year. For example, in 2020 a single taxpayer has a standard deduction amount of $12,400 (and a married couple filing jointly has twice that at $24,800). In order for itemized deductions to give you a better result than the standard deduction, they’d need to exceed that standard deduction amount of $12,400.
Let’s assume that Betty Taxpayer will have the same income in both years. She has no other deductions in the current year. She is considering making a charitable contribution of some stock. Let’s say next year Betty will have other itemized deductions in excess of the standard deduction amount. The existence of those other itemized deductions the following year would mean that her charitable deductions wouldn’t have to exceed the standard deduction amount of $12,400 to be deductible. She may want to defer gifting the stock until next year. (Note, in 2020 only, Betty may give up to $300 in cash to a public charity as an “above-the-line” deduction that need not be itemized.)
In addition to considering expenses and deductions, Betty should take into consideration whether her employer participated in the optional deferral of payroll taxes. Beginning September 1, 2020, employers can defer withholding the employee’s 6.2% payroll tax for those employees earning less than approximately $100,000 annually. Some employers, such as the military and the federal government are doing so. Many other employers are not doing so due to the complications involved. If Betty’s employer is deferring her payroll tax withholding, she’ll have larger paychecks than normal in the last four months of 2020. However, Betty’s paychecks in early 2021 will be smaller than normal to pay back the deferred withholding. Here’s a link to an article explaining the payroll tax deferral.
Betty should take all this into consideration, and more as she considers her end-of-year tax planning. Of course, if Betty will have more payroll tax withheld next year, she may find it more difficult to put money aside to make IRA contributions. Remember, you have until April 15th to make your IRA contributions for the prior tax year.
End-of-year tax planning is just part of the planning process. Estate planning includes tax planning but also much more. Estate planning also considers ensuring your assets go to whom you’d like them to go and how you’d like them to go. An estate planning attorney can help you with your planning.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.