Your Questions, Answered: Year-end 2020 Tax Planning

December 10, 2020

On this week’s episode of Your Questions, Answered Cramer Soebbing and Brian Leitner discuss considerations for tax planning, and answer the following question:

“Year-end 2020 tax planning: What should I be considering?”

Do you have questions you’d like answered? Email them to QA@marinerwealthadvisors.com, and we’ll provide answers.

Transcripts:

Brian Leitner: You have questions? We have answers back with another quick clip. We’re up on year-end planning and year-end tax planning. So that’s your questions for the day. We’re here in 2020. What are some of the things that folks should be thinking about as it relates to year-end tax planning for the year 2020 and knowing that we can’t possibly cover everything in just this quick episode? 

Cramer Soebbing: So, I think we want to start with what’s different for 2020 versus other years on year-end planning and just planning in general. So, everything that’s transpired this year with coronavirus and the pandemic has led to some changes, and especially in the relief that Congress passed earlier this year through the CARES Act. The CARES Act did a couple of things that affect 2020 specifically. Number one is it eliminated required minimum distributions from retirement accounts for this year. So, the folks that were told by the IRS they had to take certain types of distributions from their retirement accounts, that’s kind of off the table for now. That creates some more unique planning opportunities and that’s going to be unique to every individual. The other big change, for 2020 specifically, is going to be the fact that we can deduct 100% of our charitable giving against our income this year. We used to have some limitations on what was deductible as a percentage of our income. That’s off the table, which also creates some unique planning opportunities specific to this year. There are a couple other longer-term changes from the CARES Act in terms of the elimination of stretch provisions and moving the required minimum distribution age to 72, that also can be taken into account for further planning. But, specific to this year, the elimination of RMDs, as we call them, and the change to the charitable thresholds are the two biggest planning topics specific to 2020 that are different from other years. 

Brian: A great deal of change in 2020 without a doubt about it. So, what about in a traditional year, maybe just any other year end traditional tax planning, maybe some great reminders for some folks. 

Cramer: So, we like to employ this concept called tax bracket utilization for our clients. We want to look for our clients from a tax planning perspective – where they’re at for this year and from now to the end of it – what opportunities might exist. So, there’s two areas we tend to look at.  Number one: Since we’ve already hit on philanthropic and our required distributions, the other idea from a retirement planning perspective is this idea of Roth conversions. So, taking assets that we have in a pretax retirement portfolio and moving them, paying tax on them today and moving them to a Roth IRA where we’ll never have to pay tax on future growth again. We want to utilize whatever tax bracket we’re in to try to optimize the dollar amount that we might be able to convert from one bucket to the other. The other idea in terms of tax bracket utilization is taking a look at the portfolio. And I think this feeds into not only year-end 2020, but also where we want to go in 2021. There’s been a lot of ups and downs. It’s been a bit of a roller coaster ride in terms of the buckets this year with everything that’s transpired. And so, if you took the opportunity to rebalance your portfolio in February and March, or earlier this spring, you’re probably at a point in time where you need to look at rebalancing your portfolio again, with all the growth that’s transpired since that timeframe. You want to look at where there any taxes, tax losses harvested at that point in time, or do we have the opportunity to tax loss harvest here at year-end? And then, what are the implications of any gains that we might want to take going into 2021, just based off the run-up we’ve had since the spring. So, all of those fall into this bucket of tax bracket utilization that we want to look to. And the three specific tactical items are ROTH conversions, what we want to do philanthropically and how we want to reallocate the portfolio to plan for 2021. 

Brian: So, Cramer, those are great ideas. And again, we’re about to enter the new year by definition. What are some potential opportunities, maybe one or two opportunities, that people should be thinking about as we close out 2020? 

Cramer: So, you know, this is kind of a time of reflection. Right, Brian? For everything that’s transpired this year, and it’s been a difficult one for a lot of people. I think, at a higher level, a lot of conversations we’re having for clients is what are our goals for 2021? We’re going to reflect on everything that’s taken place and we’ve got some tactical items we’ve already hit on, but I think another big part of this time of the year is goal setting for 2021 and what we want to accomplish and where we want to be 12 months from today. And helping shape some optimism around how we’re going to get there, putting the plan in place and utilizing these tactical items that we can drill down onto. So, I would look at what our cash flows are going to be for 2021 and how we’re forecasting those and how that’s going to get us to hopefully the conversations we want to be having at the end of the year for 12 months from now. 

Brian: Cramer, those are great points. I mean, you know, tax planning is critical. Obviously financial planning is critical, but what are even some of those, the larger goals that folks have in life and having this time to reflect, especially after a year like we’ve had. Those are excellent points, Cramer. I really appreciate you being here. Thank you very much for your time? 

CramerI thank you for the opportunity, Brian. Take care. 

Brian: Take care. 

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