Year-end tax strategies are common and impactful tools to help you leverage the tax code and better plan for your future. Using concepts like Roth conversions, charitable giving, tax loss harvesting, minimizing capital gains, and making sure you maximize all possible savings to tax deferred accounts can all be helpful in maximizing your savings. This year in particular, it may be more important to think critically about how you make savings decisions in the years ahead.
The current pendulum of the government’s stance on taxation may take a drastic 180 degree turn. The January run-off election for two senate seats will most certainly affect just how much it could swing. With that in mind, we will briefly define a few key year-end tax strategies, President Trump’s current tax law, President-elect Biden’s proposed tax policies, and discuss how you might determine your best steps for the end of the tax year.
Let’s start with time sensitive decisions regarding your current investment strategy that must be completed before the end of the year. With the prospects of increased taxes on the horizon, many will consider Roth conversions, which is the process of taking from your pre-tax savings, like a traditional IRA or employer savings account, and converting those vehicles to a Roth savings account. The end result is the conversion amount adding to your total taxable income for the year, but allows the remaining account value to grow in the more favorable Roth tax vehicle. A Roth conversion strategy is especially advantageous to those who have seen this year’s income negatively impacted by the economic effects of the coronavirus.
Decisions regarding capital gain liabilities are also important to look into or ask a financial planner by year end. For example, does tax loss harvesting make sense for your existing portfolio positions? Do you sell a mutual fund to avoid an upcoming distribution pay out? Do you gift shares to those important to you or charities that you have a gain in to reduce your future tax liability? Those who have reached seventy and a half also have the option of giving to charities from their IRA’s in a Qualified Charitable Distribution that would not add to their taxable income for the year.
Choices that can wait until the 2021 tax filing deadline in April are saving into investment vehicles such as IRAs and Health Savings Accounts. Many will wait until the end of the tax year to determine which accounts will offer the most effective use of additional savings or if they are eligible for saving in Roth or income tax deductions on traditional IRA contributions. Under the incoming Biden administration, we could see more participation in HSAs due to their triple tax advantage of pretax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Under the current Tax Cuts and Jobs Act of 2017 that President Trump supported into law, many decisions have been simplified. There were cuts to marginal tax rates, an increase to the standard deduction, extension of child and dependent care credits, and lower taxes on investments. This was especially true for those under current thresholds that do not pay any taxes on capital gains. However, many saw their deductions from property tax and state/local income tax capped at a $10,000 cumulative deduction, when in years before, they may have been able to write off a majority of those expenses.
What President Elect Biden has proposed is a return to many of the tax standards before the Tax Cuts and Jobs Act, along with a few increases to previous law. His proposal is to increase marginal tax brackets, increase taxes on investments for those over 1 million in taxable income, higher credits for child and dependent care, and a proposed return to increase deductible amounts for property, state, and local tax costs.
Keep in mind that even with a possibility for a majority outcome for Democrats in the Senate, it may be difficult for major tax laws, especially tax increases, to be passed with such a major focus on how we establish a supportive economic environment from COVID restrictions.
The difference in proposed tax plans may alter your investment strategy for the end of 2020. If you feel that strongly that one Democrat will come away with a win in Georgia in early 2021, you may want to consider bringing forward taxable income to 2020. This means utilizing Roth conversions, gifting of appreciated securities, and selling investments for a gain at lower tax rates. Those who have higher deductions for property taxes, state/local tax, and take care of a child or dependent would likely see increased offsets to taxable income going forward.
Those who are planning for a Republican sweep of the Georgia run off senate elections would look to defer taxable gains, continue to contribute to Roth IRA’s when possible, take advantage of lower tax costs on investment transactions and have less capacity for offsets through deductions.
As always tax decisions are unique to your situation, but this year more than ever, you should carefully consider if you want to pull forward taxes to this year assuming higher taxes in the future, or letting those taxes accrue if there’s a continuation of the current tax plan into 2021. If you don’t feel confident in a decision, make sure to consult a tax or financial planning professional before making any major changes.
This document is for educational and informational purposes only and does not constitute an advertisement or solicitation of any securities or investment services provided Mainstay Capital Management, LLC (“MCM”). This document should not be construed as investment, tax, or legal advice, or a solicitation, or a recommendation to engage in any specific strategy. MCM is an independent investment adviser registered with U.S. Securities and Exchange Commission. MCM specializes in workplace savings plan portfolio management and retirement planning advice for active employees and retirees. This document was prepared by MCM primarily based on data collected and analyzed by MCM. The opinions expressed herein are those of MCM alone and are for background purposes only. MCM does not purport the analysis to be full or complete or to constitute investment advice and should not be relied on. In addition, certain information contained herein or utilized to draw the conclusions contained herein has been provided by, or obtained from, third party sources. While MCM believes that such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete. All materials and information are provided “as is” without any express or implied warranties by MCM. MCM charges its fee based on a percentage of assets under management, which creates an incentive and conflict of interest to increase assets in that account. Furthermore, MCM has two different fee schedules, and therefore has a conflict of interest when assets or accounts move from the lower fee schedule to the higher fee schedule. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Consult your financial professional before making any investment decision. Please see MCM’s Form ADV Part 2A and Form CRS for additional information.