Critical Year-End Tax Strategies

by James Lange, CPA/Attorney

This might be the most important year in our country’s history for year-end tax planning strategies. Though at press time we cannot foretell the results of the election, we do know that the SECURE Act imposed massive new tax hikes on IRA and retirement owners. If Biden wins the election and Democrats take the Senate, more extensive tax hikes will likely follow, especially for higher-income taxpayers. If Trump wins, 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.

In the meantime, below are prudent actions to consider taking before year-end.

Roth IRA conversions. 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?

1. 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.

2. Roth IRA conversions are a great defense against the SECURE Act.

3. 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.

4. 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.

5. With Biden winning the presidency, and the potential of Democrats winning a majority in the Senate, tax increases could be passed sooner than the 2025 “sunset” provisions take effect.

6. 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.

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 has had 175,150 views—clearly, I am not alone in this thinking!

Matt Schwartz, our senior estate attorney, offers great year-end strategy suggestions too.

1. 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.

2. 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 got into the nitty-gritty:

1. 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.

2. 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.

3. 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. Dominic Bonaccorsi, our newest CPA, adds: “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.”

4. 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 adds;

“Be sure to take advantage of the $300 donation deduction that taxpayers can take in 2020 for cash gifts to 501(c)(3) charities if you do not itemize deductions.”

If you would like a copy of our new best-selling book, Beating the New Death Tax, please call Alice at 412-521-2732, and we will mail you a hardcover copy right away.

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 other 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.