Written by Prio Wealth’s Director of Financial Planning, Bill Dion, CFP®
2020 was quite a year for events impacting many elements of tax and retirement planning. First, the SECURE Act (actually passed in late 2019) altered much of the landscape regarding retirement planning strategies. Then the pandemic related CARES Act created additional planning considerations. When combined with proposed elements of the Biden administration tax agenda, there are many things to keep in mind as you file your 2020 tax returns and begin preparing for the remainder of this year and years to come.
Most recently, the Wall Street Journal published an extensive guide for tax planning this year. We have highlighted a few of the most prominent issues below, as well as proposals made by the Biden administration thus far.
- Required Minimum Distributions (RMD’s) were optional for most everyone in 2020, but they will be required in 2021 (note also that the SECURE Act changed the age to 72, from 70 ½)
- Non-spouses that inherit retirement accounts will now be subject to a 10 year distribution rule, eliminating the “stretch IRA”
Planning considerations: Speak with us about your RMD requirements (if they apply), review your beneficiary structures, and consider accelerating distributions from tax deferred accounts to strategically “fill-up” low and mid tax bracket tiers, when possible.
AGI & Deductions:
- Understand if your “home” state will be taxing you on wages earned when you might have been working remotely in another state
- Flexible Spending Account (FSA) and Dependent Care Flexible Spending Account (DCFSA) dollars normally must be used within a small grace period after the end of the year but now can be rolled over for all of 2021 and 2022
- If you claim the Standard Deduction, you can claim an above-the-line charitable deduction for up to $300 (single) or $600 (joint) for charitable contributions made in cash (note in 2020, this deduction limit is $300 for all filers)
- For extremely charitable situations, itemizers can claim a higher deduction for cash charitable contributions up to 100% of Adjusted Gross Income (AGI)
Planning considerations: Talk to us and/or your tax professional before using the 100% of AGI charitable deduction, you may receive a better tax benefit by carrying forward contributions in excess of 60% of AGI into future years. If you are over age 70 ½, consider using a Qualified Charitable Distribution (QCD) strategy directly from your IRA.
The Biden Proposals:
The Biden administration has proposed many changes that we will certainly be keeping an eye on. Some of the proposed tax laws may include:
- Higher marginal tax rates for top earners
- Higher tax rates on long term capital gains and dividends
- Eliminating the step up in basis upon death
- Lowering of estate and gift tax exemptions
- Expansion of wages subject to Social Security taxes
- Raising corporate tax rates and limiting the 199A pass through deduction for business owners
- Limiting the value of itemized deductions and retirement plan deferrals (for higher earners)
Planning considerations: We think it is still too early to take sweeping actions based on proposals, but accelerating income at lower rates, selective Roth conversions, back door Roth conversions, and switching to Roth 401k contributions are high on the list of ways to mitigate the effects of anticipated tax increases in the future.
Ongoing Tax Planning Tips:
Finally, there are some tried and true planning strategies that make sense regardless of what’s happening on the legislative front. They include:
- Funding Health Savings Accounts (HSA’s), if your health plan is HSA eligible, to enjoy triple tax advantages (on contributions, growth and withdrawals)
- Funding Roth IRA’s and 529 plans accounts for the next generation
- Utilizing intra-family loans at extremely low rates to help the next generation get ahead and stay ahead
- Utilizing the annual gift tax exclusions and paying tuition expenses directly to schools to provide support in excess of the annual exclusion amounts
- Utilizing Donor Advised Funds for charitable intent combined with a gift bunching strategy
Of course, all of these strategies should be considered within the context of your priorities, overall financial plan, and your specific financial situation. Our goal is to guide our clients and help them navigate the financial issues that may impact them and their family. If you’d like more information on how these issues may apply to you specifically, please contact us.
This document is for informational purposes only and should not be relied upon as an investment, tax or legal recommendation in connection with any investment program offered by Prio Wealth LP. The opinions expressed herein are not intended to provide personal investment advice, or tax or legal advice, and do not take into account the unique investment objectives and financial situation of the reader. The information in this report was obtained from various sources, but we cannot assure its accuracy. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.