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Critical Year-End Tax Strategies
by James Lange, CPA/Attorney
This might be the most important year of any year in our country’s history for year-end tax planning strategies. As we go to press with this newsletter, we can’t foretell the results of the election. We do know that the SECURE Act—effective January 1, 2020—imposes massive new tax hikes on IRA and retirement owners. If Biden wins the election and the Democrats take the Senate, more extensive tax hikes will likely follow, especially for higher-income taxpayers. If Trump wins, there will be less certainty. Please don’t assume a Trump presidency will mean lower taxes. The SECURE Act passed at the end of last year, and I consider that a massive tax increase on IRA owners.
To help you take advantage of the best solution for your situation, we will be holding multiple webinars on October 20 and 21, 2020 putting the spotlight on actions you can take between now and year-end to protect yourself and your family from excessive taxes. Please click www.PayTaxesLater.com/2020Webinars to reserve your spot. Additional details regarding our October webinars are included on page 2 of this Lange Report.
In the meantime, there are some prudent things you can either do now or prepare to do before year-end.
Roth IRA conversions. You may not be surprised, but the concept of converting more of your funds from taxable to tax-free didn’t go out of fashion! For many clients, I would likely recommend additional Roth IRA conversions in 2020, even if you already have substantial funds in Roth IRAs. Why is this such a great year to make Roth IRA conversions?
- For IRA owners aged 72 and older, this may be the only year for the rest of your life where the Required Minimum Distribution (RMD) is waived. This will keep your income lower than other years which will potentially be a great time for a Roth IRA conversion.
- Roth IRA conversions are a great defense against the SECURE Act.
- We have the lowest tax rates in history for 2020. Most people agree tax rates are going up in the future and better to lock in tax-free growth in your accounts at today’s lower rates.
- If you are married, you are currently filing your tax return as married filing jointly. After one of you passes, the year after death, the survivor will have to file as a single taxpayer. Rates for singles are much higher and it is better to do your Roth conversions while both of you are alive.
- If Biden wins the presidency and the Democrats win a majority in the Senate, tax increases could be passed sooner than the 2025 “sunset” provisions take effect.
- Though I am not a market timer, there will be a lot of volatility in the weeks before year-end and if the market hits a low point, that might be a good time to do a Roth IRA conversion. (They ring a bell at the bottom of the market so you will know, right?)
- Many clients’ earned income, as well as interest and dividends, are down this year which also makes it a good year to make Roth IRA conversions.
I am not alone in this thinking. In March 2020, I published an article on Forbes.com titled Now is the Best Time in History To Do a Roth IRA Conversion. That article has 174,000 views—clearly, it is not just on my mind.
Of course, Matt Schwartz, our senior estate attorney, has some great year-end strategy suggestions too. Usually, I am the one who is generous spending your money for gifts to charities and family. Now it is Matt’s turn.
- Charitable – Take advantage of the unique opportunity to donate up to 100% of Adjusted Gross Income (AGI) to philanthropy. Along those same lines, still consider up to a $100K Qualified Charitable Deduction (QCD) gift. Even though there wasn’t an RMD in 2020, if you have a large IRA, QCDs might make a lot of sense for 2020.
- Large Gifts –Consider large gifts in 2020 to get the appreciation out of your estate but more importantly, to take advantage of the large current exemption that would most likely be significantly reduced if Biden wins the election and Democrats win a majority in the Senate. The step-up-in-basis rules are fodder for elimination, so a gift of securities to an individual in a lower tax bracket might be wise.
Glenn Venturino, our veteran CPA, and strategic thinker rolled up his sleeves and got into the nitty-gritty:
- Older taxpayers who have incurred higher than usual medical expenses in 2020 (while still subject to 7.5% of AGI limits), while also suspending RMDs, might qualify to itemize deductions in 2020. If that is the case, bunching deductions before year-end can be advantageous. Donating non-cash items to charity would provide additional tax savings.
- Those who have suspended RMDs in 2020 and had the accompanying Federal Income Tax (FIT) withheld should review their federal tax picture to determine if estimated taxes should be paid to replace the lack of withholdings and reduce potential underpayment penalties.
- For those with suspended RMDs, consider recognizing long-term capital gains at a 0% tax rate while still preserving other tax benefits gained by having a lower AGI or modified AGI in 2020.
- You may not have initially qualified for an economic recovery rebate based on your 2018 or 2019 tax return figures. If you have experienced reduced income in 2020 due to COVID-19, additional steps taken to lower your AGI before year-end may qualify you for a partial or full tax credit on your 2020 tax return.
Steve Kohman, CPA, CSEP, CSRP, (how many more initials will he acquire…) while always keeping his eye on the big picture, still likes to take advantage of both big and little things in the tax code. Steve adds: “Be sure to take advantage of the $300 donation deduction that people can take in 2020 for cash gifts to 501(c)(3) charities if they do not itemize deductions.”
Dominic Bonaccorsi, our newest CPA adds a thought to Glenn’s third idea: “Older taxpayers who have suspended RMDs and have little taxable income for the year can recognize long-term capital gains and pay 0% tax on the gain. If the holding was not one the taxpayer wanted to part with permanently, he can buy the holding back essentially increasing his basis in the holding for little to no tax cost.”
Our October webinars will be a great resource for most of our clients who have significant IRAs and retirement plans. Please see page 2 to find out more and reserve your spot.
Opinions expressed herein are solely those of Lange Financial Group, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources, but no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
Offering You…Four Educational Free Webinars this October!
Register to attend at www.PayTaxesLater.com/2020Webinars
Tuesday, October 20, 2020
10 a.m. – Noon (Eastern)
The Best Estate Plan for Married IRA Owners after the SECURE Act: Our Tax Savvy Thinking A Clear Explanation of the Tax Consequences of the SECURE Act:
- The profoundly negative impact of the SECURE Act on Required Minimum Distributions of Inherited IRAs and retirement plans.
- How will this change diminish your legacy, and what you can do to minimize its impact.
Aggressive Action That Must Be Taken to Preserve your Estate:
- How to ensure the financial security of your surviving spouse, and potentially save hundreds of thousands to pass on to your heirs.
- Proven strategies to protect your family, now and in the future.
Trusts:
- Are you one of the many Americans who need to redraft their trusts now that the SECURE Act has become law? You need to find out.
- Should your heirs inherit your IRA directly, or would naming a trust be safer?
- Surprise Finding: Charitable Remainder Trusts—even if you are not charitably inclined—could be financially advantageous for your family.
Advanced Strategies:
- What to do when you have children of unequal financial strength.
- A unique multi-generational plan that could save hundreds of thousands of dollars for the grandchildren.
12:30 – 2:30 p.m. (Eastern)
Live Question & Answer Session with Jim Lange: Your Questions Answered on IRAs, SECURE Act and More
Jim will answer viewer’s questions submitted in advance of the webinar as well as during the webinar. Don’t miss this opportunity to have your questions answered.
Wednesday, October 21, 2020
10 a.m. – Noon (Eastern)
Urgent Action for Tax-Savvy IRA and Retirement Plan Owners To Take Before Year End: 6 Proven Strategies to Help Protect Your Family From Devastating Tax Acceleration Losses
- Learn how to avoid the decimating taxes after the SECURE Act.
- Using Roth conversions to minimize taxes on your IRA income for decades for both you and your heirs.
- How to optimize your Social Security distributions.
- Gifting strategies after the SECURE Act.
- The numbers behind some of our favorite strategies and why they work.
12:30 – 2:30 p.m. (Eastern)
Solving the Investor’s Biggest Dilemma: How to Stop Volatility From Crushing Your Retirement Nest Egg in the Next Downturn
- Dilemma: You need to take advantage of higher rates of return on investments in a strong market but not fall victim to portfolio-crippling losses in the next market downturn.
- Mistakes: Common blunders that leave investors vulnerable to market downturns, and why it is critical to avoid commission and high-fee products.
- Solutions: Enhanced low-cost index investing, appropriate asset allocation, optimal tax planning, plus a critical component that will be revealed in the webinar.
Act now! Stop the IRS from commandeering your hard-earned wealth. Find ways for your heirs to get the biggest benefits from your hard-earned money.
Register to attend our upcoming webinars at www.PayTaxesLater.com/2020Webinars
Doing Our Best to Help Combat COVID-19
We were able to secure another shipment of KN-95 masks (though not from the same company). If you would like more masks, please email requests@paytaxeslater.com, and depending on how many you want and how many we have, we will try to accommodate you.
After fulfilling all of our direct requests for masks from charities and organizations, we sent out a public service announcement to the general public and our email list. An email subscriber (who is not a client) requested masks for his church and of course, we sent them immediately. He took our charitable gift to the next level. Including the masks, he assembled dozens of COVID-19 Protection Kits that also included a bottle of hand sanitizer and distributed them to low-income local residents. We respect his wish to remain anonymous, but we would like to acknowledge his generosity and innovative spirit.
This gave me the idea of explaining how I protect myself with what I call Jim’s Car Kit. I keep two masks, hand sanitizer, and rubber gloves in the console of my car. When I must go to a doctor’s appointment, grocery store, gas station, etc., I put on a mask and rubber gloves. It is a good idea to have a car kit and always be prepared. When I return to my car, I discard the rubber gloves, use the hand sanitizer to clean my hands, and take off the mask. If you would like more masks to prepare your own car kit, please let me know. Hand sanitizer and rubber gloves are readily available. Though the CDC recommends sanitizers of 60% or higher alcohol content, I use hand sanitizer with 75% alcohol.
The anonymous donor also included directions for how to use his COVID-19 Protection Kit. In that spirit, here are distilled rules from the CDC’s website.
8 Basic Rules to Prevent and Slow the Transmission of COVID-19
- Wear masks when in public. The mask should reach from the bridge of your nose to under your chin and fit snugly at your cheeks. Avoid touching the surface of the mask and remove it by unhooking the strap/elastic from one ear and then the other. (Confession, I normally don’t do this while riding my bike because it is awkward with a helmet. If I want some water or food, I just push it up and down which I now know isn’t correct.)
- Outside your home: Put 6 feet of distance (about 2 arms lengths) between yourself and people who don’t live in your household. Remember that some people without symptoms may be able to spread the virus. A mask is not a substitute for social distancing. Inside your home: Avoid close contact with people who are sick. If possible, maintain 6 feet between the person who is sick and other household members.
- Wash hands regularly with soap and water for at least 20 seconds especially after you have been in a public place, or after blowing your nose, coughing, or sneezing. (This is also a tough one for me. I am impatient and 20 seconds seems like a long time.)
- If soap and water are not readily available, use a hand sanitizer that contains at least 60% alcohol. Cover all surfaces of your hands and rub them together until they feel dry.
- Avoid touching your eyes, nose, and mouth with unwashed hands.
- Clean and disinfect frequently touched surfaces This includes tables, doorknobs, light switches, countertops, handles, desks, phones, keyboards, toilets, faucets, and sinks.
- Stay home if you feel unwell. Most people with COVID-19 have mild illness and can recover at home without medical care. Do not leave your home, except to get medical care. Do not visit public areas.
- Tell your close contacts that they may have been exposed to COVID-19. An infected person can spread COVID-19 starting 48 hours (or 2 days) before the person has any symptoms or tests positive. By letting your close contacts know that you may have been exposed to COVID-19, you are helping to protect everyone.