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Five Year-End Moves

Ed Baldrige

2020 will be a year to remember for decades to come-- and we still have a few weeks to go. Still, it’s not too soon to start thinking about what this year will mean in terms of your tax situation. To that end, I’ve put together five tax planning suggestions for your consideration.   

  1. 2020 Roth Conversions. These are always on my suggestion list, but this year they may be of special interest to you due to possible tax changes from budget shortfalls and because tax rates are scheduled to revert to pre-2018 levels in 2025. A ROTH conversion involves moving some or all of your pretax IRA contributions into an after-tax ROTH where withdrawals are not taxed and annual minimum distributions are not required. During the time of conversion, the converted assets are taxed as regular income at today’s rates. If you believe that future tax rates will be much higher, or you wish to pass on tax-free assets to your heirs, this may be a good strategy to explore with your accountant and with us. ROTH conversions remove the risk and uncertainty of what future higher tax rates can do to a client’s retirement income. Plus, the worst-case scenario is that you have to pay taxes on the amount converted this year rather than in future years. If you wish to explore this route before the end of the year, we advise starting sooner rather than later as there can be lags of a week or more for the processing of forms, etc.
  2. IRA Distributions. In 2020 those who are 72 and older are not required to take a minimum distribution thanks to the CARES Act. But clients may still wish to take money out of their IRAs, depending on their current tax rates and cash needs. This year presents a onetime opportunity for those subject to the minimums to convert their RMD to a ROTH (something that, in “normal” years, cannot be done).   
  3. Qualified Charitable Distributions. Qualified charitable distributions are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances at no cost. The one downside is that QCD’s are not available to everyone as only IRA owners and beneficiaries age 70 1/2 or older qualify. It is not available from company plans and not permitted to go to donor-advised funds or private foundations. They are limited to $100,000 per year for each IRA owner. These distributions are considered an exclusion from income which is better than a deduction from income, so those who are worried about reaching a certain Medicare limit do not have to consider the QCD as part of their income. Also, don’t forget that the CARES act allows everyone to exclude $300 in charitable giving from income for non-itemizers (cash gifts). 
  4. Gifting. The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple). These exemptions are scheduled to drop back to $5,000,000 and $10,000,000 respectively, after 2025, although they may be reduced before that time frame by a revenue-hungry Congress. There are three types of tax-exempt gifting:

    Lots of things to ponder. If you have questions on these strategies or wish to explore any of them in more detail, please contact us and we can discuss your particular situation.     

    While these times are stressful and uncertain for everyone, identifying areas you can control, such as financial planning and making sure that your plans are on track to achieve your goals, can relieve some of the pressure. 

    Here’s to a brighter 2021!