Tax planning is a topic for all seasons

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 02/12/20

Tax planning is a topic for all seasons

Many taxpayers wait until the end of the year to focus on tax planning. However, there may be more opportunities to use tax-efficient strategies if investors plan throughout the year.

While the tax landscape has not changed much from last year (except for changes to retirement accounts due to the SECURE Act), we are one year closer to the current tax rates’ expiration at the end of 2025.

Considering the current fiscal issues facing the federal government, we may be in a window of low historical tax rates, at least until the end of 2025. At some point, the need for revenue may require higher tax rates.

Planning considerations

Lumping charitable contributions

Taxpayers — especially those who make regular charitable donations — may see the appeal of “lumping” deductions into one year and itemizing deductions for that year. For example, instead of making consistent charitable gifts each year, consider making a large gift in one year or funding a donor-advised fund if the amount allows you to itemize deductions on your tax return. In other years, claim the expanded standard deduction. Depending on the situation, this may result in tax savings.

Utilizing qualified charitable distributions

Consider make a donation directly out of an IRA through a qualified charitable distribution (QCD). The provision allows retirees age 70½ and older to donate up to $100,000 tax free from their IRA each year. Generally, an IRA distribution is treated as taxable income. Under this provision, made permanent in 2015, those assets are excluded from income if the distribution is made directly to charity.

Roth strategies may hedge the risk of higher taxes in the future

Given the uncertainty of future tax rates and the fact that most retirees hold a majority of their retirement assets in traditional IRAs, these assets could be subject to higher taxes. Investors may want to consider the benefits of tax diversification. Using a Roth IRA strategy can provide tax-free income in retirement and help “hedge” the risk of higher taxes in the future. With the risk of tax rates edging higher, some investors may want to consider “filling up” their tax bracket with additional income. A tax professional can help determine whether adding more income before year-end makes sense. Those participating in employer-sponsored retirement plans or contributing to IRAs may want to consider making Roth contributions.

When implementing new tax strategies or evaluating existing plans against a backdrop of changes in the tax code, it is important to consult a financial advisor or tax professional. Advisors may want to consider discussing ideas from Putnam’s “10 income and estate planning ideas for 2020.”

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