May 2021
College and Tax Planning

Now that you have your 2020 tax return in hand, it is never too early for taxpayers to take the time now to prepare for the possibility of higher taxes. A multiyear tax planning approach is essential when considering how to combat future tax increases. As a result of the pandemic, state and federal deficits have risen to unprecedented levels, making it likely that taxes will increase in the coming years for wealthy individuals, particularly those who live in certain states with significant budget deficits. President Biden campaigned to eliminate many of the tax cuts enacted by President Donald Trump's administration and place higher taxes on the wealthy. The federal tax overhaul signed into law by Trump in 2017 reduced individual income tax brackets. The overhaul's income tax provisions will expire in 2025 unless there is further legislation to make the cuts permanent, and the tax bill could be repealed sooner.

Know Your Effective and Marginal Tax Rate

It is critical to know your effective and marginal tax rates when evaluating tax strategies that accelerate the reporting of income from one year to another. It is also essential to assess any unanticipated costs of accelerating income such as higher Medicare premiums resulting from the income shift since higher-income earners pay higher premiums for their plans.

Reassess Your Retirement Accounts and Roth Conversion

One strategy that could benefit wealthy individuals is converting all or part of an individual retirement account to a Roth IRA. Conversions can take place in one year or over a series of years and should be considered in conjunction with a review of the tax implications of the conversion. Once funds are converted, today's low tax rates are made permanent. Funds in the Roth grow income tax free and do not have required minimum distributions. When assessing this situation, remember that you will need to have the funds available to pay the taxes due to conversion when taxes are due the following April 15. Roth conversions are most beneficial when the taxes paid come from resources outside of the dollars converted, the Roth account is not expected to be used for many years or at all and it is invested aggressively to allow the account to grow significantly.

Review Your Plans for Charitable Giving and Charitable Lumping

For those age 70 1/2 or older who have high IRA balances, qualified charitable distributions, known as QCDs, are a preferred method of making charitable donations. This type of donation goes directly to the charity from your IRA. While you will not get a deduction for this donation, you do not have to pay the income tax on the distribution. QCDs are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances and offset required minimum distributions, commonly called RMDs. QCDs are limited to $100,000 per year for each IRA owner.

Charitable Lumping can also be a way to help your tax bottom line. Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction.

With financial planning being our center focus for our clients, in concert with strategic tax planning creates an optimal track for growth and tax savings in your investments. If you would like to review your 2020 tax return and see how some of these strategies could help you, don’t hesitate to give us a call at the office!

If you have questions, please contact us.

MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the May 2021 Newsletter: CLICK HERE