With the year rapidly coming to a close, and the upcoming tax year looming with uncertainties, you should consider updating your tax strategy to best preserve your assets into the future. Don’t wait until the end of the tax year to make these adjustments. Check out some of the tax strategies below then reach out to your financial professional now so you’re prepared for any potential tax changes in the New Year.
The 2018 changes to the tax code for charitable contributions raised deduction limits on cash contributions to eligible charities from 50% to 60% of the filer’s Adjusted Gross Income (AGI). These limitations were also repealed, which had previously put a cap on the number of charitable deductions taxpayers are allowed to take. Under the current rules, you will have the opportunity to make sizable tax-free transfers into a charitable lead annuity trust. Plus, if you are over the age of 70.5, you can avoid income tax on up to $100,000 annually by making a charitable donation of this amount from your traditional IRA.
If you’re a business owner, you may consider forming an LLC. Under the current tax laws, there is a 20% deduction on business income for pass-through entities. When taxed as a C Corp, you will actually be paying double-taxes: corporate business tax and personal income tax. LLC formation eliminates this double-taxation, allowing you to keep more of your earnings in most cases. LLC formation eliminates this double-taxation and allows owners to be taxed on the profits that they earn, based on their personal income tax rate. Their personal deductions can also help offset the cost as well. LLCs also offer flexible profit distributions that do not have to be distributed evenly to owners or even based on their percentages. This can help owners control what profits they may earn for the year and prepare for potential taxation.
Roth IRA accounts are designed to grow tax-free. While the initial funds placed into the account are taxable, you can avoid the inflated tax cost that comes with claiming the withdrawals on personal tax returns after the funds have grown well past their initial investment. Converting your traditional IRAs and 401ks to Roth IRAs now, may allow you the ability to pay taxes on the smaller portion going in.
Another effect that recent legislation has had on retirement accounts could also affect RMDs for many retirees. The SECURE Act, passed in 2019, pushed the age to begin taking distributions from 70.5 to 72 for those who have not yet reached 70.5 by the end of 2019. In addition to the SECURE Act, the recently passed CARES Act, passed in March 2020, provided tax relief that allowed for required minimum distributions (RMDs) to be avoided for this calendar year. This will also allow retirees who had taken their required minimum distribution to roll it back into their IRA without penalty, and those who have yet to take it, delay it until next year.
For those who do not need the income from IRAs this year and choose to forgo their RMDs or qualify to push back their distributions by the provisions in the SECURE Act and/or the CARES Act can avoid paying income tax on these distribution for the 2020 tax year. These qualifications could potentially present an opportunity to convert a portion of their traditional IRA to a Roth IRA at a potentially lower tax rate as long as the distribution was not taken or has been repaid.
The year 2020 has seen some significant changes for year-end tax planning. Recent legislation that had gone into effect for the year, as well as a concession for taxpayers due to the global pandemic and economic crisis that followed, have created a unique tax situation for many. This year taxpayers are seeing a wider tax bracket, changes to RMDs, larger standard deductions, tax filing deadline extensions, and increases in allowed charitable donations, all of which can change the way the current tax year will end for many.
Consider implementing some of the new tax strategies above to take advantage of the current tax laws that may work in your favor. If you are looking to create your own personalized tax strategy for the upcoming year, we can help you research, understand, and begin to implement the changes you need.