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Tax Talk Part 2: Tax Strategies

With a new administration often comes big tax policy changes.  In Part Two of our Tax Talk Webinar Recap  FJY CEO, Jon Yankee, and Kendall Coleman of CST Group review different tax strategies to help you prepare for tax law changes that may be coming.

Check Part One Here: Tax Talk: What Changes Could Be Coming?

Jon Yankee:

So Kendall, what planning tools are you giving clients to prepare for potential tax law changes? Are there certain things you’re doing to help them prepare the right way?

Kendall Coleman:

Every client is different and it depends on their individual circumstances. The changes proposed by the new administration, if they become law, will likely begin in 2022. The easiest piece of advice is, if a client is looking to sell a business or an appreciated asset, 2021 is the year. Because of the proposed changes to the capital gains tax, people will be willing to take a discount to save the potential 20% increase so there’s a lot of M&A activity going on. I know a lot of people are working with their estate attorneys to either split appreciated assets among family, get them sold, or create some strategy because that extra 20% is real.

I think a lot of clients are going to push more income into this year than the next year if they have that ability, because for higher earners, it’s an extra 3% and you’re going to pay it this year versus next year, you might as well save 3%.

Roth Conversions

Jon Yankee:

So let’s stay on Roth conversions for a second because this is a question that a lot of clients are asking. And just for clarity, a Roth conversion is when you have money in a regular IRA that money as never been taxed before because it was contributed on a pre-tax basis, a Roth conversion is taking that money out of the IRA and putting it into a Roth IRA and paying tax on that amount. Theoretically, you’d be paying the taxes at a lower rate than what it would be in the future. Then, the money in the Roth grows tax-free.

So we have a lot of clients saying, “Hm, tax rates are going up. Why shouldn’t I do that now?” So, what are some considerations when you’re advising clients on that?

Kendall Coleman:

It depends on how long you’re going to hold it, converting to a Roth makes a lot of sense because it’s tax-free when you pull the money out, and with rates going up that makes sense. The other side of it is what it does to help you in retirement.

When you hit retirement, you want to have two pools of money. You want to have tax-free dollars that you can use for spending, because what we see with the taxable dollars is that when someone doesn’t have the right advisor and all their money is in a 401k, they go to pull out $150,000 and they can’t believe the taxes they get hit with.

Jon Yankee:

So yes, and we tell our clients that as well. It makes sense to have money in different buckets because if you need to pull $150,000 out of your IRA to meet a spending need, you’re really spending $200,000 of that IRA because at least $50,000 is going to the IRS.

Jon Yankee:

One other thing I’d like to say to close up the Roth conversion conversation. One of the things we always tell our clients, because many of them have heirs and may not want to leave all of their money to charity, the Roth conversions is some of the last money you want to spend. Because it’s in a tax-free environment and if you’re looking at getting money to your heirs, it’s money that’s already had taxes paid on it, so you’re getting tax free money to your heirs.

Donor Advised Funds:

Kendall Coleman:

When it comes to charitable gifting a donor advised fund is a good way to do it now, because you can now take the itemized deduction against your income at a higher tax rate and then decide what charity you want in the future. We have a lot of clients that are doing that to maximize the tax savings of the contribution but they get to make that contribution over time.

Jon Yankee:

A donor advised fund is an account set up wherever your money is held, and whatever money you put into this account you get the tax deduction and you still control that money. So the money is invested in a basic asset allocation type of investment and it will continue to grow and be invested until you give it away. So, you could put in $100,000 now, get the charitable deduction now, but then give that $100,000 away over the five, six, seven years. It a great tool for clients who want to be charitable, want to get the maximum bang for their buck, but don’t necessarily want to give it all away right now.

Kendall Coleman:

Back when Irma hit, I was working with some people in Anguilla to set up a donor advised fund where everybody could contribute into this fund, and then when the next hurricane happened there’d be a platform to get money in and a platform to distribute money from, so you can almost have it like a holding account and use it as needed.

Qualified Charitable Distributions

Jon Yankee:

You also mentioned something called a Qualified Charitable Distribution. You have to be at least 70.5, but this is money that goes directly to a charity from your IRA and no one pays taxes on it. So these are the different tools that we’re using with our clients, especially those who are charitable, there are a lot of different options along the way.

Other Strategies

Jon Yankee:

This may come from left field, but for those who aren’t as charitably inclined, what would you say are some of the other strategies they could to improve the tax efficiency of their estate?

Kendall Coleman:

Well, working with a financial planner and an estate attorney, that’s really the key. Other than that, what you want to do is just pay attention to how you’re pulling money out of your retirement accounts, making sure that you’re not getting too much taxable income in there.

You could also do things like put money into the grandkids 529 plans. But if you’re under that standard deduction, it’s really just being smart about what taxable income you have coming in.

Jon Yankee:

That’s where working with a team can really help, a team can help you come up with some good ideas.

Kendall Coleman:

I think that’s a great point Jon. With many of our clients we have one annual meeting with the financial advisor, the attorney, both spouses, and sometimes the kids. It’s sort of a state of the union meeting, and it’s really helpful to make sure everybody is on the same page, and that’s one of the things we do well with you. At year end, we know who’s going to have gains, who’s going to have losses, so we can coordinate our efforts for the client.

Jon Yankee:

I agree with you and that’s a reason why we wanted you to be a part of this today because we have some great relationships with your firm, other firms, estate planning attorney where when we work together as a team, as partners, the client ends up winning because they have a comprehensive plan and they’ve got a team of people working with them to really help them achieve their goals.

 

Watch the full webinar to hear more of Jon and Kendall’s conversation on proposed tax law changes and what tax strategies you might consider.