With the 2020 Presidential election behind us and the end of the year fast approaching, no time is better than the present to review your financial situation.

Following the Democrats' proposed spending objectives and general opposition to the tax cuts enacted during President Trump's administration, many were anticipating that drastic year-end financial steps would be necessary after the election as Democrats seemingly had a strong opportunity to control both houses of Congress and the presidency. However, control of the Senate still remains unknown with the two Georgia runoffs set for January 2021.

In addition to the uncertain composition of the legislative branch, the new administration will likely be distracted by more pressing matters including the response to Covid-19, an economic stimulus package, and health care reform. These will likely delay and/or dilute any tax law changes that were previously assumed to be imminent.

While potential estate and income tax law changes are something we will continue to monitor, here are ten important tax, financial, and legal considerations to ponder as 2020 mercifully comes to a close.

1. Did the Pandemic Impact Your State Income Tax Obligations?

With the pandemic raging throughout most of 2020, many employees started to work from home. While this would not impact your tax obligations if you work and live in the same state, it could have a significant impact if you work in a different state than you live.

Wages, salary, and other income is first taxed in the state it is earned. Then, it can also be subject to taxation in your state of domicile or residency with most states giving you a credit for tax paid in the state where the income is earned.

If you are no longer crossing state lines to commute to work but instead working-from-home in your home state, your state tax obligations may have drastically shifted. Or even worse, could be totally unknown - an example of which is currently playing out in Massachusetts.

The Massachusetts Department of Revenue is currently taking the position that nonresidents who are also ex-commuters to Massachusetts currently working from home for Massachusetts companies are still subject to Massachusetts income taxes. This is a position that many legal scholars consider unconstitutional and New Hampshire Governor Chris Sununu has filed a federal lawsuit seeking to prohibit Massachusetts from taxing Granite State residents working remotely for Bay State companies. However, states have wide latitude to develop and impose their own tax laws and a New Hampshire victory is far from guaranteed.

Another situation to consider is whether you have spent significantly more time living in a state that is not your traditional domicile. With employees no longer tethered to their office, many have retreated from the big cities and suburbs to their second or vacation homes. If you have lived in a new state far more often in 2020 than ever before, it will be important to review your state's income tax laws to determine if you are a statutory resident. In Massachusetts and Virginia those with a permanent place of abode and more than 183 days present in the state are statutory residents subject to state income taxes on all income. California presumes you are a resident if you spend more than 6 months in the state. This could subject you to taxation in two states if you are domiciled in one state but a statutory resident in another!

In sum, if in 2020 you have started to work or live in a new place because of Covid-19 restrictions, then now is the time to see how this will impact your 2020 state income tax obligations. You may need to alter your state income tax withholdings or remit a fourth quarter estimated tax payment to compensate. Our experienced tax professionals at GW & Wade can help you sort through these complicated state residency issues.

2. Time to Use those Flexible Spending Accounts

While flexible spending accounts (FSA) are a great opportunity for you to set aside tax-free money for medical expenses and child care costs, those savings can quickly be destroyed if the funds are lost at the end of the year.

While some employers allow a $500 carryover into the next year, the option is unique to each employer and is not mandatory. Be sure to spend enough of your FSA balances before you lose it.

Additionally, if you are in the midst of open enrollment for your employee benefits, consider whether you will get a larger tax break for contributing to the dependent care FSA or from availing yourself of the dependent care credit. Generally, the larger your income the more beneficial the FSA deduction is compared to the credit. If you have questions as to whether you should contribute to a dependent care FSA, please consult with your GW & Wade Counselor or your accountant.

3. Year-end Charitable Giving

For many individuals, the holidays are often a time when they consider supporting their favorite charities. Donating in a tax-efficient manner may allow you to contribute even more to those organizations that you wish to support.

As a result of the 2018 state and local tax deduction limitation to $10,000, many taxpayers are now taking the standard federal deduction ($12,000 individual, $24,000 joint) as opposed to itemizing. This offers some tax planning opportunities:

• You could bunch multiple years of charitable donations in one year so that when combined with your other deductions, you have itemized deductions in excess of the standard deduction. The following year, you could switch back to the standard deduction when you are not contributing as much to charity.
• Another option to meet your charitable goals would be to make qualified charitable distributions from your IRA in lieu of receiving your required minimum distribution. You can transfer up to $100,000 from an IRA to a charity and the amount transferred will not be subject to income tax. It will also satisfy all or part of your annual required minimum distribution.
• A variation on the bunching strategy described above is to make a large donation to a donor-advised fund (DAF)¹. The donation will be entirely tax deductible in the year contributed (subject to adjusted gross income (AGI) limitations), but once your DAF is funded, you can authorize grants in any amounts over a time frame of your own choosing (e.g., over multiple years).

Read more about our DAF tips on our blog, The Who, When, What and How of Charitable Giving.

The CARES Act did make two changes related to charitable giving for 2020. Taxpayers utilizing the standard deduction can now claim an above-the-line deduction of up to $300 to qualified charities (not including DAFs and private foundations). Also, the limit on cash contributions to qualified public charities increased from 60% of AGI to 100%.

4. Tax Loss Harvesting

To help minimize any previously realized capital gains, consider selling stocks, bonds, or other funds that have declined in value since you purchased them.

For example, selling a security with a $10,000 loss could save you up to $2,380 in federal taxes plus another few hundred in state income taxes. You can even keep your market exposure by immediately investing in an ETF or mutual fund within a similar sector. Just be careful of the IRS's wash sale rule, as your new investment cannot be substantially identical to your original investment.

We recommend working with your professional advisor on a plan.

5. Annual Gifts

With the lifetime estate tax exemption of $11.58 million sunsetting in 2026 (and potentially on the chopping block much sooner), many taxpayers are concerned that their estate will be subject to estate taxes. One option to minimize this concern is to avail yourself of the annual gift exclusion of $15,000. You can gift up to $15,000 to as many friends and family members as you wish. If you are married, you can double the gifts to $30,000 per year.

6. Double Check Your Tax Withholding Rates

If you have had significant changes to your life over the past year, then now is time to double check your tax withholdings. Marriage, divorce, purchasing a new home, and welcoming a new child are just some of the life-altering events that can also impact your tax return.

Keep in mind that if you have too much withheld and end up with a tax refund, that is akin to giving the government an interest-free loan. Of course, you don’t want to withhold too little, and get an unwanted surprise (and potential penalties) come April 2021. Therefore, take a quick look at your tax withholdings now to make sure you’re accounting for any recent changes in your life.

7. Make (or Defer) Large Purchases of Business Assets

Accelerating large purchases of business assets into 2020 will allow you to immediately benefit from the tax deduction they will provide. However, you should also consider your expected income level next year. If you are anticipating earning much more income in 2021, deferring the purchase can provide even more tax savings.

8. Review Your Insurance Policies

Have you added a swimming pool to your house? Is your child entering his/her teenage years and displaying increasingly risky behavior? Are you now running a small business out of your home? If your life has changed recently, you may wish to consider adding an insurance rider or an umbrella policy to give yourself extra protection in case of an injury or accident.

Also, you should keep in mind that purchases of highly unique or expensive items will generally not be covered by your homeowner's insurance. So, you may wish to add an insurance rider for fine art, jewelry, or collectibles purchased.

9. Reconfirm Suitability of your Estate Documents

As you reconnect with your family members over the holidays, you may wish to take this opportunity to tell them your latest estate and legacy goals. Also, you should consider the extent that your life has changed recently and whether your estate planning documents and other important financial documents are up-to-date.

Here are five key questions that you should ask yourself:

1. Is the personal representative of your will still available and capable?
2. Has your health changed, potentially escalating the need to update your living will with new end-of-life medical care requests or revisiting your business succession plan?
3. Are your beneficiaries current? For example, is your ex-spouse still listed as a beneficiary, or has another relationship soured in some way?
4. If you have children, are the guardians assigned to raise your children in the event of your death still emotionally and physically capable?
5. Is the trustee assigned to manage the money for your children still capable?

10. Stimulus Payments

If you did not receive a stimulus payment, but believe you should have, please let us or your accountant know since there may be a way to claim it on your 2020 tax return. We do not yet know the schematics of this, but it is important to be armed with the information if need be.

If you have questions about your financial situation or any of the suggestions above, please contact us. Perhaps you’ve recently experienced a major life event, or retirement is on the horizon? No matter your circumstances, we welcome the opportunity to provide you sound financial advice, strategic tax planning, and help to achieve your lifetime goals.

We hope you have a safe, healthy, and joyous holiday season.

¹Donor-advised funds (DAF): a charitable giving vehicle administered by a public charity which manages charitable donations for organizations, families, or individuals; an alternative to direct giving or creating a private foundation. Provides administrative convenience and cost savings to donors, by conducting grantmaking through the fund.

Investment advisory services offered through GW & Wade, LLC.

The information provided above is the opinion of the author, general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Diversification and asset allocation do not ensure a profit or guarantee against loss. Past market performance is not a guarantee of future results.

Tax laws referenced and specific rates are subject to change.

In 2007, GW & Wade joined Focus Financial Partners as an indirect, wholly-owned subsidiary of Focus Financial Partners, LLC. Focus Financial Partners Inc. is the sole managing member of Focus Financial Partners, LLC and is a public company.

Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:

Laurie Wexler Gerber, Director of Marketing
GW & Wade, LLC
781-239-1188
lgerber@gwwade.com