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Tax Moves Worth Considering Before the End of the Year


Before saying goodbye and good riddance to 2020, many of us may benefit from a few tax-smart moves that are easy to overlook.

Among these are several changes enacted earlier this year as part of a record economic relief package in reaction to the coronavirus pandemic. Others are long-cherished techniques, such as donating to charity directly from your individual retirement account.

“There’s still a lot of tax planning that can be done in the last few months of the year,” says Mark Luscombe, principal federal tax analyst at

Wolters Kluwer


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Tax & Accounting.

Depending on the presidential and congressional election results, there may be other maneuvers to consider, but that’s a story for another day when a clearer political picture emerges. Meanwhile, here are a few ideas that tax pros say are worth considering before 2021 arrives:

Charitable-giving deduction: Part of the Coronavirus Aid, Relief, and Economic Security Act carved out a new deduction of as much as $300 for donors who choose the standard deduction for the 2020 tax year. This is available only if you take the standard deduction, instead of itemizing. “Many taxpayers can potentially benefit from the new provision,” says Jackie Perlman, principal tax research analyst for the Tax Institute at H&R Block Inc.

Moreover, this deduction will appear on tax returns for 2020 above the line for calculating adjusted gross income, or AGI. That’s important since your adjusted gross income can affect many other tax items, such as how much of your Social Security benefits may be subject to tax.

Watch out for important exceptions. This new break applies to “cash” donations (such as cash, check and credit cards). Gifts of “noncash” items, such as securities or clothing, don’t qualify for this provision, says Ms. Perlman. Also, donations must be made to “qualified” charities. Gifts to donor-advised funds don’t count for this break. (These funds have surged in popularity as a way to make donations and nail down deductions for the current tax year even though you can wait until future years to dole out the gifts.) Carry-over contributions from prior years don’t count either.

Because of vague statutory wording, there has been confusion about whether the $300 limit applies to each return or each person. However, according to a footnote in a publication (JCX-12R-20) by the staff of Congress’s Joint Committee on Taxation, that limit “applies to the tax-filing unit,” not to each person. “Thus, for example, married taxpayers who file a joint return and do not elect to itemize deductions are allowed to deduct up to a total of $300 in qualified charitable contributions on the joint return.” The publication says this “above-the-line” deduction is scheduled to expire at the end of this year.

Charitable groups have urged lawmakers to do more, and legislation has been proposed to increase the amount. The $300 is “a critically important first step in recognition of the need but insufficient for the size of the financial crisis nonprofits face,” says Jeff Moore, chief strategy officer at Independent Sector, a national organization representing nonprofits, foundations and corporate-giving programs. “More clearly needs to be done.”

Be sure to get proper receipts for donations. For more details, see IRS Publication 526.

Suspension of charitable-deduction limits: This temporary suspension could affect donors who itemize deductions and want to contribute a larger share of their income this year than was allowed previously. As the IRS website explains, the total amount you could deduct for 2019 generally was limited to “no more than 60%” of adjusted gross income, although that percentage could be further limited to 50%, 30% or 20%, depending on “the type of property you give and the type of organization you give it to.” For 2020, the adjusted-gross-income limit generally “has been eliminated for cash donations” by individuals, says Mr. Luscombe.

RMD changes: The Cares Act waived required minimum distributions during 2020 for IRAs and most other retirement plans. That includes for beneficiaries with inherited accounts, the IRS says. More details on this and other changes can be found in publication JCX-12R-20 on the Joint Committee on Taxation website.

IRA charitable transfers: Here is an old technique that many older investors have used. Once you are 70½ or older, you typically are eligible to transfer as much as $100,000 a year from an IRA directly to qualified charities and have this “qualified charitable distribution” be considered nontaxable. This also counts toward your required minimum distribution for the year (although it isn’t tax-deductible as a charitable contribution). Just be sure to make the transfer directly to the charity, says Mr. Luscombe of Wolters Kluwer.

Educator expenses: Many teachers and certain other educators shouldn’t overlook a longstanding deduction of as much as $250 a year for “unreimbursed trade or business expenses,” as the IRS puts it. For a married couple filing jointly, the maximum is $500 if both spouses are eligible educators, “but not more than $250 each,” the IRS says. This deduction applies to amounts paid or incurred for “participation in professional development courses, books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom.” You’re eligible “if, for the tax year you’re a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.” This is another “above-the-line” deduction that affects the AGI calculation. Nearly 3.5 million returns took this deduction for 2018.

Mr. Herman is a writer in New York. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

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