Our Thoughts

Punxsutawney Phil has Spoken – Time to Boogie on Your Tax Strategies!

By: S. Alexis Grason

As one year ends and another begins, did you miss any tax planning opportunities? The beginning of the year is the best time to plan! 

Each December presents its challenges for routine priorities and crunch-time procrastinators. As FJY reflects on how to get ahead of some of these imminent deadlines, we want to share with you the tax conversations we had close to the New Year’s wire. 

The Retirement Savings Conversation

It is essential always to keep IRS deadlines in mind for retirement plans, so the priority is often to double-check your savings for the year. While IRA contributions have tax filing deadlines for the following year, you want to be sure and get your retirement plan contributions before year-end. Here is the list for updated 2020 figures. And get those IRA contributions for 2019 in by April 15, 2020! 

Insights from 2018 Tax ReturnsTax-Return

  • Deduction Planning for 2020 and beyond
    • Now that we have a tax year, including the 2017 Tax Cuts and Jobs Act (TCJA), we can analyze a client’s current situation utilizing standard deductions versus itemized deductions. This allows us to leverage these two methods depending on their current situation and see if there is a planning opportunity from one year to another. 
      • “Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions…If you normally make your donations at the end of the year, you can bunch donations in alternative years – say, donate in January and December of 2020 and January and December of 2022,” as noted by CST in this comprehensive article for all year-end planning. 
      • Creating collaborative partnerships with our clients’ tax professionals enhances our view of the whole picture for the benefit of our clients.
  • Charitable Contributions

The College Savings Conversation

If saving for education costs is a priority, have you optimized your state’s college savings plan? If you moved states, it is worth evaluating your new state’s 529 plan to see if opening a new plan for your current state will gain you higher state tax deductions. See how the states compare. Now that up to $10,000 annually can be used from 529 plans for K-12 education without federal taxes or penalties, watch this strategy if one state provides for this and another does not. See which ones do 

Roth Conversions

If you are building your savings, the priority is to pay yourself first through savings, and the second is to keep an eye on the taxation of the savings. Roth IRAs give you a tax-free type of savings bucket so that your dollars will go further during retirement. Imagine each dollar you withdraw in retirement NOT being subject to taxes. Now that tax rates are low, and the Required Minimum Distribution (RMD) has increased from 70.5 to 72, there could be a sweet spot for conversion. 

Anyone at the beginning of your career, get as much as possible into Roth IRA now! You will have plenty of time later to save taxes into other types of accounts as your income grows. 

RMDs vs. QCDs

The Required Minimum Distribution (RMD) age has increased for those turning 70.5, after 12/31/2019. That means that RMDs will now be required at age 72! Read more about what legislation changed this: SECURE actHowever, Qualified Charitable Distributions (QCDs) are still permitted at age 70.5 meaning that you can make a withdrawal from your IRA and send it directly to a charity without incurring income tax. Does this strategy make sense for you to align with your giving inclinations, reduce the size of your IRAs, and still allow you to save money in taxes? Maybe. Let’s talk at the beginning of the year, so you have plenty of time to evaluate. 

The Usual Housekeeping

  • Year-end distributions – 2019 was a banner year for the market, so put your investment gains to work by making sure your portfolio is rebalanced and aligned to your target. 
  • Monitoring your income – Evaluate your projected revenue for 2020. How does it compare to 2019 and possibly to 2021? Can you strategize for more than one tax year at a time? 
  • Fees – Many prefer tax-deferred Traditional IRAs pay for investment management fees since the funds are not taxed annually, and these fees are no longer deductible on your itemized deductions. 
  • Tax-loss harvesting – This is more applicable during phases of stock market volatility and who knows that 2020 will bring. You can harvest tax losses to offset any gains. Be sure to watch out for the wash sale rule

Plan this year and get ready for next year too. Lean on a fee-only financial planner at FJY and leverage that relationship by creating a team with your financial planner and qualified tax professional.