Year-End Tax and Financial Planning Ideas Coronavirus / Election Edition

There is no question that 2020 has been a year that everyone just wants to put behind them and hope for a brighter 2021.  But before you start thinking about 2021, do not forget about your 2020 year-end tax and financial planning because there are still opportunities and strategies to consider, at least from a planning perspective, to take advantage of before year-end.  

Below is a list of Top 10 2020 ideas that you should consider as published by AccountingToday:

1. Did you get your stimulus check?  If not, claim it if you qualify.  But understand that in 2020 the IRS will be looking at your 2020 income to verify if you should pay it back or not.
2. Have taxable capital gains in 2020?  Look at Qualified Opportunity Zone investments that could defer your gains and even eliminate some of your gains.  Not all opportunity zone investments are the same.  Make sure the investment is appropriate before investing.
3. If you were impacted by the COVID-19 pandemic, you may be eligible by the CARES Act to access your IRA or 401k (up to $100k) without the 10% penalty and allow you to pay back the funds withdrawn or spread the taxes over three tax years.
4. COVID-19 impacted incomes for many Americans, so make sure your estimated taxes and tax withholdings are up-to-date and that you are on track.  Do not get surprised or pay way more than you need to.
5. Now is the time review and possibly update your Estate Plan to maximize your use of your Estate Tax Exemption.  With low-interest rates and low business valuations, you could potentially give more of or make better use of expanded Lifetime Gift Exemption which is currently $11.5 Million per taxpayer.  Doing so can lower or maybe eliminate your projected estate tax obligation.  It is also important to pay attention to the November election because a “blue wave” could cut this exemption in half and possibly make the change retroactive to January 2021.  The timing of any gifts or changes is important.
6. If you own a business that is a C Corporation (subject to double tax), do not forget to use your unused Alternative Minimum Tax Credits.
7. Do you have net operating losses in 2018, 2019, and 2020?  The Cares Act allows for these losses to be carryback up to 5 years!  Get your refunds now.  You may even want to accelerate deductions in 2020 to carry back losses to higher tax years.  In some cases, the tax law changes are mandatory so talk to your tax professional.
8. The Cares Act fixed a technical issue with the Tax Cuts and Jobs Act of 2017 for depreciation for Qualified Improvement Property.  If you have qualified improvements that were deprecating under the old rules that did not allow for accelerated depreciation, go back, and fix the returns, and get your refunds.
9. Did COVID-19 dramatically affect your business and you have losses?  President Trump made an unprecedented national emergency declaration and your COVID-19 related losses from loss of inventory, store closures, office closures, etc. may qualify for disaster loss refunds.
10. You can defer payroll tax to 2021, however, should you?  The liquidity may be helpful to cashflow, however, consider point 7 above.  You may want to use the deduction of paying payroll taxes now versus in 2021 due to the net operating loss carryback rule update for 2018, 2019, and 2020.

There are many other potential Coronavirus-related benefits in the CARES Act such as skipping your 2020 Required Minimum Distributions, or in the event of lower-income in 2020 due to layoffs or reduced wages.  Now is a good time to consider Roth IRA Conversions before year-end.  The point is, do not be so quick to focus on 2021 before making sure you have taken advantage of these and many more 2020 tax planning opportunities that may be going away.

There are also policy changes that may be coming given any possible election outcome or change in power in DC between the political parties.  Although nothing is final, we have looked at both the Trump vs. Biden Tax Policy proposals and you may want to look at updating your Estate Plan and/or your Business Succession Plan.  If there is a change in the estate tax exemption which is currently $11.6 million per individual or in income or investment taxation, waiting until 2021 could be too late to make changes to your plans.  One big changed being eyed for removal by the Biden campaign is the 1031 Tax-Free Exchange of Real Estate.  There is also the possibility of the elimination of the 2017 Tax Cuts and Jobs Act that will increase taxes on both individuals and business owners.

The end of the year presents a unique opportunity to self-reflect on your personal financial planning situation. With factors like tax law changes, life changes, or simply working towards your goals, now is an especially important time to review things. It is always a good time to see if you are on-track at your stage in life. Taking what we now know about the new tax law, the Tax Cuts and Jobs Act of 2017, and weaving together all of the other areas of your personal finances is one of the key ways we provide value to you as your trusted advisor. Below are some things we would like to help you think through before the year ends.

Income Tax Planning: Make sure you are implementing tax reduction strategies such as maximizing your retirement plan contributions, HSA contributions, FSA distributions, ROTH conversions, tax-loss harvesting your portfolios, making smart tax-efficient charitable contributions, and understanding all the new tax benefits, can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from previous years. We talk about many of these in our year-end tax planning checklist.

Estate Planning: Examine a flowchart of your current estate plan to visualize what would happen to your assets and how the current estate tax law will impact you. For some taxpayers with large taxable estates, the time is now to review your estate plan to maximize the increased estate tax exemption set to expire in 2026!  You want to be sure that your estate planning documents are up to date. In addition to your will, it is important to review your power of attorney, health care documents, trust agreements, and beneficiary designations to assure they all coordinate together according to your desired estate distribution. If you have recently been through a significant life event such as marriage, divorce, or the death of a spouse, this is especially important right now.

Investment Planning: Recently, we have seen increased market volatility and it may feel uncomfortable. Market declines are a natural part of investing and understanding the importance of maintaining your investment discipline during these times is vital. We have always suggested that it is important to “Stress Test” your portfolio to see how it would respond if, for example, there were to be a recession.  We talk about how to navigate recessions in our Recession Survival Guide.  Review your Portfolio Allocation to reaffirm that your current investment allocation and discipline are aligned with your financial plan. Regular portfolio rebalancing and reviews will keep the appropriate amount of risk-balanced in your portfolio. If you are retired and living off your portfolio assets, you need to maintain an appropriate cash reserve to cover expenses.  You do not want to be forced to sell equities in a down market. Check out our Retirement Survival Guide where we discuss this in more detail. It is also a good idea to look at expected distributions from mutual funds. If you recently purchased a mutual fund (or have a fund with a holding-period loss or small gain), you can check with the fund company to see if there will be a large capital gain distribution that will be taxable. If you sell the fund before the distribution, you can avoid the tax hit.  TIP: These occur annually – typically in December.

Charitable Giving: There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock would allow for a full deduction of the value and avoid paying capital gains taxes. Maybe you have some high concentrated stock positions on a low-cost basis.  These securities are excellent candidates for charitable contributions.  Plus, you can always buy back the stock if you really insist on owning it.  Another great option is to make direct gifts to charities from your retirement accounts if you are over age 70 ½ known as Qualified Charitable Distributions (QCD).  Doing so will not add income to your return AND qualify towards your required minimum distributions for the year.  You may also want to consider bunching charitable deductions by deferring donations to next year or making your planned donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor-advised fund for your charitable giving. These contributions need to be locked-in by year-end to get a deduction, so now is a great time to start considering your plan.  For more advanced charitable giving, consider Charitable Remainder Trusts that can provide a stream of income while you are alive, but leave the remainder to charity.

Retirement Planning: Think about your future when working becomes optional. Whether you expect a typical full-retirement or maybe a career change to something different, determining an appropriate balance between spending and saving for now and the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you. We have a great Retirement Planning Checklist for you to see if you are on track!

Cash Flow Planning: Review your annual spending and plan for next year. Understanding your cash flow needs is an important aspect of determining if you have enough assets to meet your goals. If you are retired, it is particularly important to maintain a tax-efficient, safe, and sustainable withdrawal strategy to cover your spending needs.  This is addressed in our Retirement Survival Guide and described in Planning for Retirement the R.I.T.E. Way®  (R.I.T.E. stands for “Retirement Income Taxed Efficiently” – see the image in the link from the guide). If you have not yet reached age 70 ½, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70 ½ make sure you are taking your required minimum distributions.  Otherwise, the penalties are significant if – up to 50%! This may also include reviewing strategies to maximize income from Social Security and Pensions.

Risk Management: It is always a good idea to periodically review all your insurance coverage. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property and casualty insurance coverage are available when you need it. If you are in a Federal disaster area, there are additional steps to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life, long-term care, and/or disability insurance.  There are both term and permanent options are available for life insurance and under certain situations, some policies may even help you save tax-deferred for retirement.

Education Funding: Funding education costs for children or grandchildren is important to many families. While the increase in college costs has slowed some lately, this is still a major expense for most families. It is important to know all the options available to save for education to determine the optimal strategy. Funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous. For those with kids in college, it is also important to understand the rules when it comes to taking 529 Plan withdrawals tax-free.  Don’t forget to submit your reimbursements prior to year-end. 

Elder Planning: There are many financial planning elements to consider as you age, and it is important to consider these things before it is too late. We have talked about planning for incapacity several times on the STA Money Hour radio show. There are many issues to consider when caring for aging parents or other loved ones.  Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understands your plans will help reduce family conflicts and have your wishes considered.

Business Planning: If you own a business, you should especially be paying close attention to your year-end.  Why?  Congress is constantly making tax law changes that impact many businesses and the tax they or their owners pay.  A new tax code section for businesses, 199A, gives business owners who are structured as an S Corp, Partnership, Single Member LLC or Sole Proprietor the benefit of deducting an additional 20% for the net income of their taxes!  For many, this can be a huge saving.  The rules are very complicated and require that you plan at year-end to maximize your potential deduction.  The new tax law includes two new changes that limit the amount of interest you may be able to deduct and no longer allows net operating losses to be carried back to prior years. You can only carry them forward with a limit of what you can deduct in any year.  Also, if you are looking to start giving your employees more benefits and are considering setting up a qualified retirement plan, some options are required to be in place before the following calendar year depending on which plan is right for you. Whether it is a 401K, SEP IRA, Defined Benefit Plan, or Simple IRA plan, we can help you determine which plan is right for your business.

Conclusion: In addition to the ideas above, earlier this year we updated our Top 10 Tax Planning Ideas for 2019-20.  The decisions you make each year with your personal finances will have a lasting impact on your long-term financial plan. Do not leave tax benefits behind.  Do not miss out on savings today.  If you don’t have a financial plan, here is a short video that shares Avidian Wealth’s Financial Planning Process. We hope this letter has begun to generate some insight into areas of your personal finance that need attention. Please contact us when you are ready to talk through year-end planning.

---

Disclaimer:

The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or product. Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by  Avidian Wealth Solutions), or any non-investment related content, made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Solutions. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Avidian Wealth Solutions is neither a law firm nor a certified public accounting firm and no portion of this article should be construed as legal or accounting advice. A copy of the Avidian Wealth Solutions’s current written disclosure statement discussing our advisory services and fees is available for review upon request.  ALL INFORMATION PROVIDED HEREIN IS FOR EDUCATIONAL PURPOSES ONLY – USE ONLY AT YOUR OWN RISK AND PERIL. 

---

Please read important disclosures here