2020 Tax Planning

With the long 2019 tax season in the books, I shift my focus to 2020 tax planning. In response to the COVID-19 pandemic, Congress passed the CARES Act. Paycheck Protection Program (PPP) loans and Economic Impact Payments (the $1,200 checks) have received a lot of attention. But for tax planners, perhaps the most interesting provision of this legislation is the suspension of Required Minimum Distributions (RMDs) for 2020.

Opportunity Knocks

In general, taxpayers 72 years or older  must take RMDs from their retirement accounts (e.g. traditional IRAs and 401Ks). But not this year! By not taking an RMD, many retirees would be in a lower tax bracket and some wouldn’t pay income tax at all. This presents an opportunity to “manufacture” some income in 2020, perhaps by realizing capital gains or executing a Roth conversion. If you have already taken your 2020 RMD, you have until August 31 to return the money to your account.

Realize Capital Gains?

If you usually use your RMD to pay your living expenses, but you also have a taxable investment account, this could be a good year to sell appreciated stock. Capital gains are taxed at a lower rate than ordinary income such as RMDs; this may provide an opportunity to lower your tax bill while still meeting your budgetary needs. If you re-invest proceeds from the sale, you’ll have a higher cost basis in the new investment, reducing your exposure to future capital gains tax.

Roth Conversion?

Assets held within a Roth IRA grow tax-free and may be distributed tax-free upon retirement. Since retirees typically no longer earn income from employment, their only way to add funds to a Roth IRA is by converting eligible retirement funds; generally this means transferring funds from a traditional IRA to a Roth IRA. Because of the suspension of the 2020 RMD, many retirees may find themselves in a lower tax bracket, making Roth conversions more attractive.

Charitable Giving in 2020

Those of us under age 72 may also benefit from the CARES Act, which included favorable provisions for the givers out there. In 2020, taxpayers are allowed an “above-the-line” deduction for qualified charitable contributions up to $300 ($600 if married filing jointly). This provides a rare opportunity for the estimated 86% of US taxpayers who use the standard deduction[1] to receive a federal tax benefit for charitable giving.

For years, the only foolproof way to avoid income tax has been to not make any money. But this year, there may be another way. Thanks to the CARES Act, taxpayers may deduct cash charitable contributions up to 100% of their AGI in 2020.

These are just some of the many ways you can reduce your tax liability in 2020. Call me anytime and we can discuss what might work best for you.

We are happy to announce that Parker Gallagher has joined our team as a Tax Specialist and Assistant Portfolio Manager. Parker has relocated to Portland from North Carolina and has hit the ground running with the team since his arrival. He is looking forward to meeting and working with everyone as well next tax season!

[1] Source: Tax Foundation General Equilibrium Model, April 2019.