By: 24 September 2020

Finding yourself with some downtime at home and don’t want to binge another Netflix show? Make the most of it! Here are five basic things you can think about in preparation for this year’s taxes.

1. Review your paycheck.

Review your most recent paystub.   Do this mainly to see if anything is materially different than last year and to ensure that your withholding is sufficient.  If your compensation has changed a lot, this may be a reason to take a closer look at things so you know what to expect in April. 

To avoid an estimated tax penalty, you need to pay in, through quarterly estimates or withholding, the lesser of:

  1. 100% of your prior year’s tax or
  2. 90% of your current year’s tax. 

*If your prior year AGI was $150,000 or more, then a 110% of prior year’s tax rule applies.  

You don’t want to overpay your tax either and make an interest free loan to the government, so it can be useful to calculate your projected tax to make sure the withholding is appropriate – not too low and not too high.  To keep your money in your hands as long as possible, if your 2020 tax is higher than 2019, you will generally want to use the 100%/110% of last year’s tax safe harbor.  If your 2020 tax is less than 2019 you will want to target paying in 90% of your projected 2020 tax.

2. Look at your investment income.

Review your year-to-date interest, dividends, and capital gains and try to determine what amount of income your investments will produce for the entire year.  If this income is much higher or lower than usual, you will want to evaluate the tax implications.

3. Fund your retirement plans.

Decide if it makes tax and financial sense to contribute to your 401(k), IRA or other retirement plan, or to increase or decrease what you’ve been contributing during the year. For 2020 only, if you are taking required distributions from your retirement plan, you can choose to forgo your RMD under the CARES Act.  You might do this to lower your 2020 tax if you have other cash sources to meet your living expenses.

4. Take capital losses or gains.

If any of your investments have dropped below what you paid, you might want to sell them to recognize the losses to offset your capital gains. Losses from the sale of stocks or other capital assets can offset short and long-term capital gains plus $3,000 and any excess loss is carried forward to future tax years.  And you can repurchase similar (but not the exact same) investment immediately so that you are not out of the market. This strategy is useful to lower current year taxes if you have net gains and defer eventual capital gains. 

If, conversely, you are in a low tax bracket, selling investments to create capital gains may be a good idea. To the extent you are in the 12% federal tax bracket, long-term capital gains are federally tax free and for many people it may even be beneficial to recognize capital gains at the 15% bracket

5. Consider your charitable giving strategy.

Depending on your anticipated tax situation and your charitable goals, you may want give appreciated stock to your desired charity(ies) or perhaps to a donor advised fund, and it may sometimes be advisable to “bunch” charitable gifts in 2020 to optimize the tax benefit. 

If you are over age 70 ½ and taking required IRA distributions, you can give directly to charity out of your IRA through a qualified charitable distribution (QCD).  This is particularly beneficial to taxpayers age 70 ½ (or age 72 beginning in 2020) and older who do not itemize deductions.


There are certainly many other tax strategies and considerations that may be unique to your situation, but these five steps can be a good first step for most taxpayers.


Author Image

Matt Weier, CFA, CFP®

Director of Investments
Chartered Financial Analyst
Certified Financial Planner®

For information regarding our blog disclosures, click here.

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