Making a List and Checking It Twice

As one of the strangest years ever thankfully draws to a close, it behooves us to take stock and see our situation as it now stands. A host of questions inevitably arise, the type that beg for our honest and, we hope, astute answers.

So let’s make a list. Look over each item and ask yourself how you stand. Try to envision any changes you think you should make. And for those questions that involve your account here at RFS, we invite you to raise them with us. Perhaps together we can come up with the perfect answer. You can always call me personally 301-294-7500.

Making a List

1. Do I Have Enough Cash?

Do you have enough cash available to pay for short-term needs. If not, you might raise cash by realizing some of the gains in your portfolio—either the one we manage or any self-managed accounts you might have. Potential 2021 changes to the tax laws—including significant increases in the capital gains tax—might make this the perfect time to set some gains at current tax rates. Any action along these lines must occur before December 31, 2020. See our Note in item #2.

2. Are Losses Really a Good Thing?

If you have other brokerage accounts, a careful look at your holdings might reveal some with that awful red color. Of course, everyone likes to avoid that color as best we can, but no one can predict where a particular investment might go. If a position does dip into the red, now might be a good time to sell it while at the same time selling some of those with that lovely green color. The red will cancel out the green, much to the tax man’s chagrin.

Note: We can look at any self-managed holdings you have and provide you with a “second-opinion” analysis. You might very well have some gains you should take and some losses to offset those gains.

3. Do My Retirement Accounts Need a Pick and a Shovel?

Retirement accounts can serve as your private gold mines. But to make those mines productive, you have to do some digging. Are you contributing as much as the law allows to your retirement accounts? If not, take your effective tax rate and multiply it by the amount you’re not contributing. The result is the amount you’re failing to find in that gold mine of yours.

Make sure you do some thinking and figure out if you’ve left some 401K or other retirement accounts at previous employers. These you should roll over into an IRA or other tax-deferred account.

Have you considered converting an IRA into a Roth IRA? Have you thought about gift-funding Roth IRAs to family members who have earned income?

4. How Can I Help My Family with the Costs of Education?

You might want to consider giving to 529 accounts for children or grandchildren. They can then enjoy tax-exempt growth if the account is used for educational expenses. You might even be able to “Superfund” these accounts by giving five years’ worth of exclusion gifts ($75,000 for individuals, $150,000 for married couples).

5. Am I Ready for Changes to the Gift-Tax Laws?

Right now, you enjoy an $11.58 million lifetime gift-tax exemption. But if you listen carefully, you can hear serious discussions in Washington about reducing this amount by 50% or more. Gifts now (before the law changes) can lock them in as free from gift taxes. And they can help reduce taxes by moving income-producing holdings to taxpayers in lower brackets.

6. Are There Some Charities I Want to Support?

If you have some assets that have appreciated significantly, you can give them to a charity and deduct the market value of the asset at the time of the gift. The charity can then sell that asset and pay no taxes on the gain. Poof! The gain escapes the clutches of the tax man.

The CARES Act changed deductibility of some charitable gifts. In 2020, if you itemize deductions, you can give away (and then deduct) your entire adjusted gross income and pay zero income tax. Of course, only some people can afford to live on other assets and ignore their adjusted gross income. But if you find yourself among those fortunate few, a charity awaits your generosity.

7. Am I Missing Out on Any Benefits Associated with COVID?

Congress responded to the COVID outbreak by passing a number of laws assisting businesses and individuals. Many of these advantages dwell within the tax code. According to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, “Both individual and business taxpayers may need to act before year-end to take advantage of many of these tax breaks.”[1]

Mr. Luscombe’s analysis appears in an article in Accounting Today, which summarizes his checklist as follows (some of these appear on our list above):

“Here’s a breakdown of the items that may need to be acted on according to Luscombe:

  • “More than 30 tax breaks that Congress has permitted to regularly expire and then renew currently expire at the end of 2020, including individual, business, and energy tax breaks.
  • “More generous charitable contribution deduction provisions expire at the end of 2020, including a new above-the-line charitable contribution deduction.
  • “The ability to make expanded penalty-free withdrawals from retirement plans for COVID-related expenses expires at the end of 2020.
  • “The deadlines to apply for Economic Impact Payments expire before the end of the year, although tax credit is available on the 2020 tax return.
  • “Employers must continue to deal with a variety of tax credits and deferrals related to employee payroll taxes that expire at the end of 2020.
  • “A number tax provisions provide retroactive relief, which might require filing of amended tax returns for prior years, including net operating loss carrybacks, modifications to deductions for non-corporate business losses, modifications to business interest deduction limitations, qualified improvement property, the Kiddie Tax, disaster relief, and the 30-plus regularly expiring provisions.
  • “The possibility of higher taxes in 2021 might suggest a reversal of the usual year-end tax planning strategy, which is to defer income and accelerate deductions. Taxpayers may also want to realize capital gains, make lifetime gifts, and engage in Roth conversions.”[2]

Checking It Twice

The above list includes some of the major items you should consider as the curtain draws on 2020. After you review your list, you can call on me to help you with checking it twice; we can explore these and any other issues we might identify. Feel free to call my office at 301-294-7500. We can discuss your list and perhaps add to it.

All of Us

All of us here at RFS extend our best wishes to you in the holiday season. Play it safe. Wear your mask. No holiday hugs (bummer). And count the many blessings we enjoy as a free people in the country we all love.

Best wishes,

Jack, Val, Toni, Chris, Jim, Michael, Jay, Dinah, and David