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Urgent Year-End Tax Planning Moves

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With the election of Joseph R. Biden Jr. as the 46th U.S. President, higher federal taxes are almost certain to be enacted in 2021.

Federal emergency aid to individuals and businesses after the Covid outbreak has exploded the federal deficit and now a second aid package is widely expected. The balance-sheet of the United States has been unexpectedly weakened by trillions, which makes tax hikes a financial reality.

The tax hikes will be negotiated in Congress in 2021 and subject to old-fashioned Washington horse-trading. Exactly which taxes will rise, and, by how much, is not known yet. But it's prudent in certain situations, where the tax savings could be substantial, to plan for the tax hikes expected to be enacted in 2021 by taking proactive defensive  measures before the end of 2020.

Required Minimum Distributions. One situation is if you take required minimum distributions from a retirement account or are about to start taking RMDs; a provision under the federal emergency relief in the CARES Act allows you to defer your RMD in 2020.

With the epidemic keeping retirees at home, your expenses may be very low in 2020. Deferring all or part of your distribution would leave more invested in a tax-advantaged account. This involves investment risk but tax-free compounding may make the math work, depending on your personal circumstances.

Over 59½. Another situation requiring action by the end of 2020 applies to individuals 59½ or over with retirement assets in an IRA. You want to consider converting assets in a traditional IRA or qualified retirement account to a Roth IRA.  Making that money tax-free for the rest of your life could benefit you, your surviving spouse and children, too.

With the stock market nosediving more than 7% in a single day several times in 2020, between now and the end of the year you want to consider converting assets in traditional IRAs or retirement accounts the next time stocks plunge. That would reduce the taxes that would be owed on the withdrawal from the traditional IRA. Which would then you set you up to convert that money to a Roth account.  The tax- free compounding may make a big difference in your after-tax outcome and benefit your heirs.

Family Transfers. President-elect Biden's tax plan calls for cutting the estate tax exemption from the current $11.58 million to $3.5 million. This would expand the estate tax to millions of families as of 2021. By the end of 2020, parents and grandparents expected to have a taxable estate under Biden's plan should consider selling property – like real estate, securities, or interests in private companies – on an installment-loan basis to children or grandchildren.

With interest rates at historic lows, the minimum rate on intrafamily loans is also extremely low and structuring transactions to give parents or grandparents annual income from the sale proceeds for many years can be a smart family plan. Moreover, structuring the sale in installments would maximize the lifetime exemption from gift and estate taxes, which can save families on estate taxes.

Charitable Donations. An unusual variety of opportunities are available if you are charitably inclined. Under the CARES Act, those age 59½ and older  can deduct up to $100,000 withdrawn from an IRA if you give it to charity, thus lowering your adjusted gross  income dollar for dollar.

If you're a pre-retired doctor or dentist, bunching your deductions for charitable donations can be especially beneficial to you as well as the cause you want to support --  but, again, only if you take care of the details by the end of 2020.

Another charitable-giving tip: In 2021, the Biden tax plan would hike the top tax rate to 39.6% and the favorable capital gains rates of 2020 could be eliminated  If you are sitting on a large capital gain or have a single stock or asset in which your wealth is concentrated, then a charitable donation of that property may be wise before the end of 2020.

Similarly, if you are about to retire and have most of your retirement portfolio invested in a single company, you may want to consider setting up a charitable trust to lower the taxes on the sale of the stock. This would assure a stream of income for yourself and your spouse sourced by a diversified portfolio, while leaving a remainder amount to a cause you’re passionate about.

With a slimmer majority of Democrats in the House of Representatives and control of the Senate undecided until after runoff elections in Georgia on January 5, 2021, we'll keep you posted on developments.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. It does not take into account your investment objectives, financial or tax situation, or particular needs. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. The material represents an assessment of financial, economic and tax law at a specific point in time and is not a guarantee of future results.