Year-End Planning in 2020
By: Cameron Diehl, CFP®
Friends – Every fall I write about year-end tax planning, its importance overall and what might be different in that particular year. Whether it was in 2017 following an extremely calm year, in 2018 following significant tax reform or in 2019 as we were setting new all-time highs.
And this year is no different. As we wind down a year unlike nothing any of us have ever seen, there are quite a few planning opportunities for investors to consider before December 31.
I’ve provided a high-level overview of some key points below. To be clear, this list is by no means exhaustive and these topics are very complex. If you have questions or think they apply in your case, please give me a call.
- Evergreen Reminders – Some year-end planning advice is timeless - reviewing your income and deductions, contributing to tax-advantaged accounts (401(k)s, IRAs, HSAs, 529s, etc.), harvesting tax losses, rebalancing portfolios, completing gifts and planning ahead for next two or three tax years.
- Changes to Required Minimum Distributions (RMDs) – A few recent changes that may have been overlooked pertain to distributions from IRAs, including:
- RMDs Starting at 72 – With the SECURE Act passed at the end of last year, the starting age for RMDs was raised from 70 ½ to 72.
- RMDs Waived for 2020 – As part of the CARES Act this year, RMDs have been waived entirely for 2020, providing potentially significant tax relief for many investors.
- Changes for Inherited IRAs – There were also changes to the ways beneficiaries with inherited IRAs must withdraw funds, eliminating provisions to stretch withdrawals over their life expectancy, instead forcing the entire amount to be withdrawn within ten years.
- RMDs Starting at 72 – With the SECURE Act passed at the end of last year, the starting age for RMDs was raised from 70 ½ to 72.
- Planning for Potential Changes – Any year when we have a national election there is potential for significant changes. If there isn’t a shift in control of Washington, there may not be dramatic updates to tax laws. However, if there is, it’s important to be aware of proposed changes and be prepared to act. A few to consider this year are, the potential for:
- Higher Income Taxes – Current proposals feature a potentially higher top marginal tax rate (proposed above $400,000 income) AND limitations on certain deductions. This combination is somewhat unique and were these changes to look likely to be implemented, investors could consider accelerating income AND deductions into 2020. In this scenario, year-end Roth IRA conversions may become particularly attractive and one of the easiest strategies to implement.
- Higher Capital Gain / Qualified Dividend Tax Rates – Higher rates on long-term capital gains and qualified dividends have been proposed for earners with more than $1,000,000 in income. For the portion of the population who find themselves in this range, strategies to consider would include:
- Selectively realizing gains in 2020
- Planning ahead to thoughtfully time realizing large capital gains in future years
- Revisiting municipal bonds for tax-free income
- Re-assessing dividend-producing investments or mutual funds that distribute gains each year in taxable accounts
- Considering additional tax-deferral opportunities through permanent insurance or annuities
- Accelerating the sale of a business or real estate into 2020 or considering installment sales going forward
- Selectively realizing gains in 2020
- Higher Income Taxes – Current proposals feature a potentially higher top marginal tax rate (proposed above $400,000 income) AND limitations on certain deductions. This combination is somewhat unique and were these changes to look likely to be implemented, investors could consider accelerating income AND deductions into 2020. In this scenario, year-end Roth IRA conversions may become particularly attractive and one of the easiest strategies to implement.
- Lowered Estate Tax Limits – With the potential for the current $11.58 million lifetime estate and gift tax exclusion to be reduced, investors with sizable estates may consider strategies to accelerate wealth transfer and gifting strategies into 2020 before changes can be implemented - especially as the IRS has already clarified that it won’t ‘claw back’ previous transfers if future limits change. These are extremely complex decisions that require thoughtful planning.
All of these changes and strategies are complex and should be considered within the context of your overall financial picture, and informed by sound advice. Please contact me if you have any questions.
Disclosure: Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability. Dividends are not guaranteed and must be authorized by the company's board of directors. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
