With the Tax Cuts and Jobs Act adding to the challenge of year-end tax decisions, we’ve already seen a few areas where our clients need to act immediately to help reduce their tax liabilities.

These issues don’t affect every taxpayer, but those who are impacted need to be proactive.

Retirement Plans

It’s a good idea every year to examine your retirement plans to make sure you are maximizing your allowable contributions, and 2020 is no exception.

The IRS has increased the contribution limits of 401(k) accounts to $19,000. The IRA limit was increased to $6,000.

Home Equity Line of Credit

If you used your home equity line of credit for anything other than home improvements, you should consider paying it off before the end of the month.

That’s because, with the new law, the interest may no longer be deductible. If you used the money to complete a renovation project, in most cases, you’ll be able to deduct the interest. If you used the money to pay off credit card debt, for example, the interest is not deductible.

Investments

If you sold assets like stocks at a profit this year, you may want to consider selling under-performing assets for less than you paid for them to minimize your tax liabilities. The strategy—called “harvesting losses”—uses losses to offset gains.

To implement this strategy properly, we recommend you discuss your intentions with your CPA or financial advisor to make sure you are in compliance with all of the appropriate government regulations.

Deductions

Under the new law, taxpayers have an incentive to look at their taxes over multiple years. Since the Tax Cuts and Jobs Act doubled the standard deduction, fewer people will benefit from itemizing deductions on a single-year basis.

But by “bunching” deductions over several years, you have an opportunity to reduce your taxable income by shifting liabilities between years.

Let’s say you will take the standard deduction for 2020.

Then, instead of making charitable contributions and/or paying obligations like your mortgage by December 31st of 2020, you make those payments a day later, on January 1st of 2021. You’ve shifted those 2020 potential deductions to 2021.

In 2021, you’ll pay your mortgage and make charitable contributions, etc., as you normally would, but before the end-of-business on December 31st of 2021, you also make your 2022 annual payments and contributions.

You’ll take the standard deduction in 2020, but in 2021 you’ll be able to take three years of deductions against your 2021 taxes, which may be considerable depending on your personal financial situation.

Divorce

A not widely discussed aspect of the Tax Cuts and Jobs Act is that starting with divorces finalized in 2021, alimony payments will no longer be tax-deductible for the payer. (And the payee will no longer have to include alimony payments in his/her income.)

A divorce finalized in 2020 will be taxed according to the current regulations.