One of our main goals as holistic financial professionals is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component to help our clients benefit from potential tax reduction strategies.

2020 was an unusual year that had several major legislative bills passed that could have an impact on your taxes. It is also a presidential election year, so investors might want to think about potential future tax strategies. Although it will take more than a change in president to enact tax laws changes, it is always wise to educate yourself in advance. This report includes sections on possible tax law changes if there is a change in administration (based on the current proposals) and notable CARES Act and SECURE Act changes that you should be aware of. The main focus of this report is on what individual taxpayers can do to potentially save money on their 2020 taxes.

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. One big uncertainty for all taxpayers is what will happen to the Tax Code after 2025. The way the Tax Cuts and Jobs Act is set up, the changes to the corporate side of the tax code are permanent while many provisions for individuals that took effect in 2018 are currently set to expire after 2025.

The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2020

For 2020 there are still seven tax rates. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Under current law this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2020

2020 is the third year for the new tax laws and new tax forms that were created by the 2017 Tax Cuts and Jobs Act (TCJA). One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income as well as a number of other personal circumstances. As you read through this report it could be helpful to note those strategies that you feel may apply to your situation so you can discuss them with your tax preparer.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2020, the standard deduction amounts will increase to $12,400 for individuals and married couples filing separately, $18,650 for heads of household, and $24,800 for married couples filing jointly and surviving spouses.

As a reminder, in 2018, the Tax Cuts and Jobs Act roughly doubled the standard deduction. It’s reported that this helped decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.

The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is now capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For many taxpayers, the larger standard deduction and changes to key itemized deductions resulted in them no longer itemizing. It was estimated that about 15 million filers used the charitable contribution write-off in 2018, a sharp decline from the 36 million who utilized it in 2017. For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.​ (wsj.com 2/15/2019)

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation. ​If you are charitably inclined and need some guidance, please call us and we can assist you.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017, mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. The threshold has been lowered to the first $750,000 or $375,000 (married filing separately) on homes purchased after December 15, 2017. All interest paid on any mortgage taken out before October 13, 1987 is fully deductible regardless of your mortgage amount (called “grandfathered debt”). This change under the TCJA law applies to all tax years between 2018 and 2025. Many mortgage holders refinanced for lower rates in the last few years so remember for larger mortgages, that could change your situation.

Home equity lines of credit (HELOCs) are deductible as well, but only if the funds were used to buy or substantially improve the home that secures the loan. Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit card or other personal debts, then the interest isn’t deductible​.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2020 up to $15,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.58 million in 2020).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $75,000 lump sum contribution to a 529 plan can be applied as though it were $15,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. ​If you want to explore setting up a 529 plan, call us and we would be happy to assist you.

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act is still the qualified business income deduction under Section 199A. Taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20 percent of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. ​This piece of tax legislation would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2020

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2020 and start thinking about your strategy for 2021. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. ​The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,500, up from $19,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases also to an additional $6,500 ($26,000 total). ​As a reminder, these contributions must be made in 2020.

IRA contribution limits unchanged.​ ​The limit on annual contributions to an Individual Retirement Account (IRA) which was increased in 2019, remains at $6,000 for 2020. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). ​IRA contributions for 2020 can be made all the way up to the April 15, 2021 filing deadline.

Higher IRA income limits. ​The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $65,000 and $75,000 for 2020. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $104,000 to $124,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2020 as the couple’s income reaches $196,000 and completely at $206,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2020. ​Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs.​ ​The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $196,000 – $206,000 for married couples filing jointly in 2020. For singles and heads of household, the income phase-out range is $124,000 – $139,000. For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. ​Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. ​The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly in 2020, $48,700 for heads of household and $32,500 for all other filers.

Be careful of the IRA one rollover rule. ​Investors are limited to only one rollover from ​all ​of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year​. The CARES Act allowed you to not take your Required Minimum Distributions (RMDs) in 2020. If you took an RMD in 2020, you had till August 31, 2020 to roll that distribution back into your IRA and this roll back was not subject to the 60 day or one per year rule. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

Some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the new laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. ​Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. ​In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. ​If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. ​If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Always double-check brokerage firm reports. ​If you sold a security in 2020, the brokerage firm reports the basis on an IRS Form 1099-B in early 2021. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends did not change for 2020, but the income thresholds to qualify for the various rates did go up. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2020. In 2020, the 0% rate applies for individual taxpayers with taxable income up to $40,000 on single returns, $53,600 for head-of-household filers and $80,000 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2020. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

NOTE​: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and those are taxed at ordinary income
tax rates.

Some Notable and Continuing Tax Changes for 2020

Some previous itemized deductions are still affected in 2020 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. ​The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The adjusted-gross-income threshold was slated to jump from 7.5% to 10% after 2018, but the 2019 government funding law revived the 7.5% figure for 2019 and 2020. The IRS on IRS.gov provides a ​long list of expenses​ that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT)​ ​are still limited to $10,000.

The deduction for casualty and theft losses​ ​is currently allowed only for presidentially declared disaster areas.

Alimony deductions.​ ​Under prior law, alimony and separate maintenance payments were deductible by the payor and includible in income by the payee. For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse.

Education Planning

Education benefits.​ The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2020. Also, ​starting in 2020, ​529 plan funds can now be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans​.

The 2020 ​lifetime learning credit​, which allows you can claim 20% of your out-of-pocket costs for tuition, fees and books, up to $10,000, for a total of $2,000 phases out for couple at $118,000 to $138,000. The AGI range for singles is $59,000 to $69,000.

Charitable Giving

This is a great time of year to clean out your garage and give your items to charity. Please remember that you can only write off these donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill.

Send cash donations to your favorite charity by December 31, 2020 and be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, including all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by December 31, 2020.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. ​You may gift up to $15,000 tax-free to each donee in 2020. These “annual exclusion gifts” do not reduce your $11,580,000 lifetime gift tax exemption. This annual exclusion gift is doubled to $30,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. ​There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 on the IRS website​.

Make gifts to trusts. ​These gifts often qualify as annual exclusion gifts ($15,000 in 2020) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes for 2020 is $11.58 million, up from $11.4 million in 2019 ($23.16 million for married couples), and the income tax basis step up/down to fair market value at death continues. These changes provide high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in ​2026​, the ​estate tax exclusion​ will return to $5 million (adjusted for inflation). On November 26, 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for decedents with large estates.

Some Notable Coronavirus Aid, Relief, and Economic Security (CARES) Act & SECURE Act Changes

The CARES Act and the SECURE Act (passed in December 2019) had provisions that could affect you in 2020. This section reviews some of the changes for informational purposes only. You should discuss your impact with a qualified tax professional.

Recovery Rebates

Under the ​Coronavirus Aid, Relief, and Economic Security (CARES) ​Act​, many Americans received direct economic recovery rebate payments of $1,200 ($2,400 for couples filing jointly), plus $500 more for each child under age 17. The payments started to phase out for joint filers with adjusted gross incomes above $150,000, head-of-household filers with adjusted gross incomes (AGIs) above $112,500, and single filers with AGIs above $75,000. Technically, the rebate is an advance payment of a special 2020 tax credit. You’ll reconcile your rebate on your 2020 return. If you received a rebate please alert your tax preparer!

Retirement Plan Changes

There were several changes for retirement plans in 2020 from the ​SECURE Act​, which was signed into law late in 2019. The ​CARES Act also included a few stipulations that affected retirement accounts. Both acts significantly impact required minimum distributions (RMDs). One notable change is that under the ​SECURE Act​, the beginning age for taking RMDs changes from 70½ to 72. (This change only applies to account owners who turn 70½ after 2019.) ​Reminder: ​The CARES Act allowed you to not take your RMDs in 2020. If you took an RMD in 2020, you had till August 31, 2020 to roll that distribution back into your IRA and this roll back was not subject to the 60 day or one per year rule.

The ​SECURE Act​ also provided that:

• People with earned income can make contributions to Traditional IRAs past the age of 70½ starting in 2020.
• Anyone having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% fine for pre-age-59½ withdrawals.
• Beginning in 2020, fellowships, stipends or similar payments to graduate or post-doctoral students are treated as compensation for purposes of making IRA contributions.

Perhaps one of the biggest changes from the SECURE ACT was that the rules for withdrawing money from inherited IRAs and workplace retirement accounts were tightened and now most inherited retirement accounts need to be fully distributed within 10 years of the death of the IRA owner or 401(k) participant. This new rule is somewhat complex and requires some planning. Also, there are some exceptions, so please call us or see a tax professional for details. (Please note: Inherited IRAs from individuals who died before 2020 aren’t affected by this change.)

In addition to the RMD suspension mentioned above, the ​CARES Act includes a few other key retirement-related tax breaks for 2020 including:

• Waiving the 10% penalty on pre-age-59½ payouts from retirement accounts for up to $100,000 of coronavirus-related payouts. A coronavirus-related distribution can also be included in income in equal installments over a three-year period, and you have three years to put the money back into your retirement account and undo the tax consequences of the distribution.
• Allowing eligible individuals to borrow more from workplace plans such as 401(k)s—up to the lesser of $100,000 or 100% of the account balance—until September 23, 2020. Repayments on retirement plan loans due in 2020 are also delayed for one year.

Possible​ ​Tax Changes if Joe Biden Wins

While the election has not been decided, ​Democratic Party nominee Joe Biden has released some possible law changes he would like to make if he unseats incumbent Republican Donald Trump for the presidency come November. While these would be future changes and have to be approved by Congress, to help you think about planning your future strategies here are some of the proposed changes to be aware of:

Increase Corporate Tax Rates. Under the TCJA, the peak marginal corporate tax rate was reduced from 35% to 21%. Under the Biden tax plan, the corporate tax rate ​would be increased to 28%​.

Increase the marginal tax rate for top earners. ​Biden’s tax plan would raise the top marginal income-tax bracket from 37% to 39.6% (please note that the TCJA ​lowered the top marginal bracket from 39.6% to 37% in 2018​).

Raise the capital gains tax on filers with incomes above $1 million. ​Biden’s tax proposal calls for filers with over $1 million in income to pay ordinary tax rates on their gains, no matter how long they’ve held an asset. This would imply 39.6%, plus the Net Investment Income Tax (NIIT), for a total tax rate of over 43​%.

Limit itemized deductions. ​Biden’s tax plan includes a cap on itemized deductions of 28%. This means for each dollar of itemized tax deductions, including charitable contributions, a taxpayer or couple filing jointly would only receive a maximum benefit of $0.28. This 28% limit would hold true even if a filer is paying a higher marginal tax rate.

Phase out small business income deductions over $400,000. ​Biden’s tax plan aims to keep Qualified Business Income (QBI) QBI deductions in place for those with less than $400,000 in earnings but phasing out pass-through deductions for those with over $400,000 in earnings.

Eliminate step-up in basis​. ​Biden’s tax plan wants to put an end to the step-up in basis. A ​step-up in basis​ refers to the cost basis of assets or property transferrable to an heir upon death. If, as an example, an individual purchased a home for $300,000, but it was worth $600,000 at the time of their death, their heir would pay capital gains on anything over $600,000 if the home were ever sold. If Biden’s tax proposal were to become law, heirs would not “inherit” a stepped-up cost basis.

Reduce Estate Tax exemption. Biden’s tax plan wants to reduce estate tax exemptions back down to $3.5 million immediately. This means estates over that value would be taxed.

PROACTIVE TAX PLANNING — A “Proactive” approach to your tax planning instead of a “Reactive” approach could produce better results!

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), registered investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Sources: Forbes, Fortune, MarketWatch, Wall Street Journal, Oppenheimer Funds, Investopedia, Barron’s.

Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, LLC (IFG). Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Please consult a qualified tax professional to discuss tax matters. Contents provided by the Academy of Preferred Financial Advisors, Inc. Reviewed by Keebler & Associates. © Academy of Preferred Financial Advisors, Inc. 2020.

The post Proactive Year-end Tax Planning for 2020 and Beyond appeared first on Financial 1 Tax.

Proactive Retirement Planning Using the New SECURE Act

Setting Every Community Up for Retirement Enhancement

An Overview of Some Key SECURE Act Changes That May Affect Your Retirement Strategy
Law enacted on December 20, 2019

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. This new legislation made major changes to a number of tax rules that govern retirement savings. Many of these changes started in 2020 and some of the details are still being finalized.

Making retirement plans more available to Americans and encouraging retirement savings was the driving force behind the creation and enactment of the SECURE Act. It includes significant changes that all retirement savers should be aware of for retirement and tax planning purposes.

Familiarizing yourself with how the SECURE Act may impact your current retirement plan and discussing it with a knowledgeable financial professional can help you proactively and properly amend your strategy to adjust to the SECURE Act changes.

Proactive Tax Planning with the SECURE Act

Here are some of the changes that may affect retirement savers and their tax strategies:

• The Required Minimum Distribution (RMD) age was raised from 70 ½ to 72.
• The age limit for traditional IRA contributions was eliminated.
• A new 10-year rule essentially requires (there are some exceptions) all inherited IRAs, Roth IRAs, and qualified plans to be distributed within 10-years of death.
• There are new 529 Education Fund Rules.
• There is a 10% retirement account penalty exception for both births and adoptions.

For informational purposes only: this information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or tax professional.

The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

Qualified Charitable Distributions (QCDS) are a potential strategy for retirement savers.

While they are not new or changed by the SECURE Act, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCDs) of up to $100,000 are available to an IRA owner over 70 ½ years old. They are many times used as a proactive tax planning strategy for anyone over 72 taking a Required Minimum Distribution (RMD). An amount directly given to an eligible charity processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of calculating if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while reducing your taxes.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you do not let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

This is a specific area where a financial professional can offer some suggestions and strategies. We would be happy discuss with you whether or not this tax saving strategy may beneficial to your specific situation.

Potential New 10-Year Rule Strategies

Potential New 10-Year Strategies: Roth IRA Conversions

The new 10–Year rule reminds us that a proactive approach could potentially reap rewards. To maximize your situation under the new 10-year rule, you may want to consider Roth conversions and possibly spreading distributions over many years and lower brackets. Unlike distributions from regular IRAs, Roth IRA qualified distributions are not taxed.

Roth IRA Conversion Considerations

Your personal critical decision factors include your:

• Tax rate differential (tax in year of conversion vs. tax rate in withdrawal years).
• Use of “outside funds” to pay the income tax liability.
• Need for IRA funds to meet annual living expenses.
• RMD considerations (remember these begin at age 72 for non-Roth IRAs).
• Time horizon (how old are you and how long can you defer taxes).
• Estate tax considerations.
• Ten-year Rule.

Potential Benefits of a Roth IRA Conversion

• They could lower overall taxable income long-term.
• ROTH IRAs enjoy tax-free compounding.
• ROTH IRAs have no RMDs (at age 72).
• ROTH IRAS allow tax-free withdrawals for beneficiaries.

Each case can present different opportunities and it is best to talk with us or your tax professional about your specific situation.

We understand this decision can be complex and these are not easy choices. We are here to help you review your personal situation and recommend the best course of action.

Family Tax Bracket Management©

A critical area to review due to the SECURE Act is what we refer to as overall Family Tax Bracket Management©. Mathematically speaking, if you are in a higher tax bracket than your beneficiaries, it might make sense to let them take distributions in their tax bracket rather than you in yours. However, if your beneficiaries are in a higher tax bracket, it might make sense to take distributions in your bracket, convert these accounts to Roth IRAs and leave them an account that still has to be taken out in 10 years, but can grow tax free.

Something to Consider: even if NO changes are made to tax rates, in 2026 current law states that tax brackets will return to the older higher rates.

One strategy we can help with is to review you and your beneficiary’s marginal tax rate(s) each year.

Should I leave my beneficiaries a Traditional or Roth IRA?

Over your lifetime, you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other complex part is withdrawing those assets while attempting to minimize taxation. A common goal is to try to proactively plan withdrawals from retirement accounts to minimize your tax liability.

The SECURE Act creates an opportunity to review your retirement plan with an eye for tax planning. Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them. We want to provide proactive tax planning ideas when possible.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Could it get worse, or will it get better? How long will this last?

We know these are many investors primary questions. A large part of the answers will depend on when the growth rate of Covid-19 cases stabilizes and how quickly a cure can be developed and distributed. It will also depend on whether or not fiscal and monetary emergency measures are enough to help ease the economic crisis. While we are not clairvoyant, we are making our best efforts to stay aware of changes that could affect your personal situation. Our objective is to try to offer the most educated guidance to help keep you on track with your financial goals. We realize that this is a very emotionally straining time and we want to make sure you know we are here for you. Call us with any questions or help with any concerns you may have.

Panic and bad choices can cause more harm for investors than a virus or market downturn!

Help us grow!

This year, one of our goals is to offer our services to several other people just like you! Many of our best relationships have come from introductions from our clients. Do you know someone who could benefit from our services?

We would be honored if you would:

  Add a name to our mailing list, Bring a guest to a workshop, or Have someone come in for a complimentary financial checkup.

  Please call Financial 1 at 410-908-9293 and we would be happy to assist you!

If you are currently not a client of Financial 1 Wealth Management Group, we would like to offer you a complimentary, one- hour, consultation with one of our professionals. Please call 410.908.9293.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Note: The views stated in this letter are not necessarily the opinion of Independent Financial Group, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. Stock market. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal.

Diversification is used to help manage investment risk; it does not guarantee a profit or protect against investment loss. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Contents provided by the Academy of Preferred Financial Advisors, Inc.

The post SECURE Act Changes That Affect Your Retirement appeared first on Financial 1 Tax.

Tatyana Bunich CEP.RFC. | Contact us: 410-908-9293

Income tax is a large revenue source for the United States government. While tax rates have changed many times, since the 1860’s, the United States has used a “progressive” tax code. A progressive tax code means that people who make more money are taxed at a higher rate than those who make less money. Our progressive tax system works by placing earners through different brackets according to how much money they make. The dollar amounts define your tax brackets and there are differing tables depending on your filing status (single, married, etc.). This matters in determining your marginal tax rate.

Filing 2019 Income Taxes

Understanding Marginal Tax Rates

Determining your tax bracket is not as simple as just adding up your total income and checking a tax table. Taxpayers need to calculate their taxable income (which can be sometimes referred to as their “adjusted gross income”) and then adjust their income for any deductions, adjustments and exemptions they are allowed to find their final taxable amount.

Once you determine your final taxable income amount, it’s critical to know that not all of your income was taxed at the same rate. So, for example if you are married filing jointly, your first $19,400 is taxed at 10%. If these same tax filers have a final taxable income of $95,000, then these taxpayers are in a “marginal tax bracket” of 22%. The key thing to note is that in this example, the last dollar earned is taxed at that 22% tax rate.

2019 Tax Law Updates

For 2019, Form 1040 has been slightly redesigned. There is time to look into tax planning ideas for your 2020 taxes, but here are some things that 2019 tax filers should review. They include:

• Tax brackets have been slightly adjusted.
• The standard deductions have risen from 2018.
• There are still caps to state and local tax (SALT) deductions.
• There are new deduction rates for medical expenses.
• Capital gains will still impact your income.
• There is still a 3.8% Medicare Investment Tax.
• Charitable donations are still deductible.
• You might still be able to contribute to retirement plans (or take an RMD) if appropriate.

2019 Tax Tables and Tax Rates

There are still seven federal income tax brackets for 2019. The lowest of the seven tax rates is 10% and the top tax rate is still 37%. The income that falls into each is scheduled to be adjusted in 2020 for inflation. For 2019, use the chart in this report to see what bracket your final income falls into.

TAX TIP: If you are not sure how best to file, ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2019 Standard Deduction Amounts

Most taxpayers claim the standard deduction. For 2019, the standard deduction has slightly increased. The amounts are now $12,200 for single filers and $24,400 for those filing jointly ($18,350 for head of household filers). If you are filing as a married couple, an additional $1,300 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,650 can be made.

Increased Child Tax Credit

For 2019, the maximum child tax credit is $2,000 per qualifying child. Up to $1,400 of the Child Tax Credit is refundable; that is, it can reduce your tax bill to zero and you might be able to get a refund on anything left over.

There is also a non-refundable credit of $500 for dependents other than children. The modified adjusted gross income threshold at which the credit begins to phase out is $200,000 and $400,000 if married filing jointly.

State and Local Tax (SALT) Deduction

2019 also continues the changes to state and local tax deductions that cap a taxpayer’s state and local tax (SALT) deduction at $10,000. This includes both state income and property taxes. This change affected a large number of taxpayers who live in states with high property taxes and those who pay larger state income tax bills.

Medical Expense Deduction

In late December 2019, legislation retroactively made the 7.5% threshold available to taxpayers in 2019 and 2020. The 10% threshold amount was postponed until 2021.

Investment Income

Long-term capital gains are taxed at more favorable rates compared to ordinary income. For qualified dividends, investors will continue to be taxed at 0, 15 or 20%.

One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce long-term capital gains. You do not have to wait 30 days before you buy back this investment—the 30-day rule only applies to losses, not gains.

Note: This non-taxable capital gain for federal income taxes might not apply to your state.

TAX TIP: Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for single filers with income from $200,000 to $434,550 and 23.8% for single filers with income above $434,550. It can raise the effective rate to 18.8% for married taxpayers filing jointly with income from $250,000 to $488,850 and to 23.8% for married taxpayers filing jointly with income above $488,850.

Calculating Capital Gains and Losses

With all of these different tax rates for different types of gains and losses in your marketable securities portfolio, it’s probably a good idea to familiarize yourself with some of the rules:

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used to offset net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
• Any remaining unused capital losses can be carried forward and used in the same manner as described above.

TAX TIP: Please remember to look at your 2018 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2019. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2019, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution. However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2019 is the seventh year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

A helpful strategy has been to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages

If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, plan for this tax when you calculate your estimated taxes.

If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help—they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Charitable Gifts and Donations

When preparing your list of charitable gifts, remember to review your checkbook register so you don’t leave any out. Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count noncash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you’ll also need an acknowledgement from the charity documenting the support you provided. Remember that you’ll have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.
You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2019, the IRS will let you deduct that travel at .14 cents per mile.

Child and Dependent Care Credit

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school daycare while working. Some parents overlook claiming the tax credit for childcare costs during the summer. This tax break can also apply to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp. So, If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35% of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.

Contribute to Retirement Accounts

If you haven’t already funded your retirement account for 2019, consider doing so by April 15, 2020. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2020, you can wait until then to put 2019 contributions into those accounts. To start tax-advantaged growth potential as quickly as possible, however, try not to delay in making contributions. If eligible, a deductible contribution will help you lower your tax bill for 2019 and your contributions can grow tax deferred.

To qualify for the full annual IRA deduction in 2019, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phase-out from $64,000 to $74,000 for singles and from $103,000 to $123,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $193,000. For 2019, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2019 is $56,000.

Although contributing to a Roth IRA instead of a traditional IRA will not reduce your 2019 tax bill (Roth contributions are not deductible), it could be the better choice because all qualified withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2019) to a Roth IRA, you must earn $122,000 or less a year if you are single or $193,000 if you’re married and file a joint return.

If you have any questions on retirement contributions, please call us.

Roth IRA Conversions

A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and qualified withdrawals are tax-free in the future, a time when tax rates might be higher.

Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Required Minimum Distributions (RMD)

If you turned age 70½ during 2019, you still have until April 1, 2020, to take out your first RMD. This is a one-time opportunity in case you forgot the first time. The deadline for taking out your RMD in the future will be December 31 of each year. If you do not pay out your RMD by this deadline, you may be subject to a 50% penalty on the amount you were supposed to take out. Starting in 2020 the SECURE Act changed the starting RMD age to 72. If you have any questions on your Required Minimum Distributions please call us.

Other Overlooked Tax Items and Deductions

Reinvested Dividends – This isn’t a tax deduction, but it is an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will, in turn, reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they’re included in the proceeds of the sale.

If you’re not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.

Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Charitable Gift Directly made from IRA – Individuals at least 70½ years of age can still exclude from gross income qualified charitable distributions (QCD) from IRAs of up to $100,000 per year. Please remember to double check on what counts as a qualified charity and distribution before using this tax strategy.

Helpful Tax Time Strategies

Although many deductions were eliminated under the new laws, it might still be helpful to write down or keep all receipts you think are even possibly tax-deductible. Sometimes, taxpayers assume that various expenses are not deductible and do not even mention them to their tax preparer. Don’t assume anything—give your tax preparer the chance to tell you whether something is or is not deductible.

Be careful not to overpay Social Security taxes. If you received a paycheck from two or more employers and earned more than $132,900 in 2019 you may be able to file a claim on your return for the excess Social Security tax withholding.

Don’t forget items carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.

Check your 2018 tax return to see if there was a refund from 2018 applied to 2019 estimated taxes.

Calculate your estimated tax payments for 2020 very carefully. Many computer tax programs will automatically assume that your income tax liability for the current year is the same as the prior year. This is done to avoid paying penalties for underpayment of estimated income taxes. However, in some cases this might not be a correct assumption, especially if 2019 was an unusual income tax year due to the sale of a business, unusual capital gains, the exercise of stock options, or even winning the lottery! A qualified tax preparer could be able to help you with a tax projection for 2020.

Remember that IRS.gov is a valuable online resource for tax information.

Always double check your math where possible and remember it is always wise to consult a tax preparer before filing.

Proactive Tax Planning for 2020

As you know, with the passage of the Tax Cuts and Jobs Act (TCJA), tax brackets, thresholds, and tax rates changed for many filers in 2018. In 2019, taxpayers are still adjusting to some of these changes. For 2020, we will continue to keep our clients updated on any new tax law changes and strategies that could potentially be helpful. For now, please review the 2020 tax tables and it’s never too early to start thinking ahead.

Click tables to view larger

Items Taxpayers Should Consider to Proactively Tax Plan for 2020

1. Prepare a 2020 tax projection – Taxpayers already know the 2020 rates and by reviewing their 2019 situation and all 2020 expectations of income, a qualified tax preparer could be able to help you with a tax projection for 2020.

2. New contribution limits for retirement savings – For 2020, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500. The limit on annual contributions to an IRA remains $6,000 ($7,000 for those 50 or older). The catch-up contribution limits for those 50 and over remain unchanged at $1,000.

3. Explore if a potential Roth IRA conversion is helpful for your situation – A Roth IRA can be beneficial in your overall retirement planning. Investments in a Roth IRA have the potential to grow tax-free and they don’t have required minimum distributions during the lifetime of the original owner. Also, Roth IRA assets may pass to your heirs tax-free. Roth conversions include complex details and are not right for everyone, so please call us to see if this makes sense for you.

4. Take advantage of annual exclusion gifts – For 2020, the maximum amount of gift tax exemption is $15,000. This means you can give up to that amount to a family member without having to pay a gift tax. Ideas for gifting can include, contributing to a working child (or grandchild’s) IRA, or gifting to a 529 plan, which is a tax-sheltered plan for college expenses.

5. Consider bunching your charitable donations into a Donor Advised Fund (DAF) – Now is the time to explore if it is helpful for your tax situation to deposit cash, appreciated securities or other assets in a Donor Advised Fund, and then distributing the money to charities over time. Up to 60% of your adjusted gross income can be deductible if given as donations to typical charities.

6. Look into Health Savings Accounts (HSAs) – In general, to qualify to contribute to a health savings account in 2020, you must have a health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage. You can contribute up to $3,550 to an HSA if you have single coverage or up to $7,100 for family coverage in 2020, which is slightly more than the 2019 limits. If you’re 55 or older anytime in 2020, you’ll continue to be able to contribute an extra $1,000. HSA’s include complex details and are not right for everyone, so please call us to see if this makes sense for you.

The New SECURE Act and Proactive Tax Planning for 2020

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, was passed by the Senate on December 19, 2019. This bill increased access to retirement plans and also includes some reforms to Defined Contribution (DC) Plans, Defined Benefit (DB) plans, Investment Retirement accounts (IRAs) and 529 plans. Open Multiple Employer Provisions (MEP’s) will be effective January 1, 2021, but many of the other provisions in the law become effective January 1, 2020. The SECURE Act also brought changes for retirement plan holders. We will try to help you with updates as your situation requires this year.

Among the many changes the SECURE Act included, we feel there are three major areas that could affect many client’s retirement planning strategy. These are:

1. One of the most impactful provisions of the SECURE Act is the “death” of the stretch IRA as an estate planning tool for most non-spousal beneficiaries.

If the original owner of an IRA passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. Please note that this new rule will only apply to IRAs inherited after the January 1st, 2020 effective date. All existing inherited IRAs are grandfathered in under the old rules. This NEW change will result in us taking a look at all clients that have accumulated retirement assets to discuss potential strategies that could be best for their situation.

2. Another notable change is the RMD age moved from 70½ to 72.

The Act states that this change applies beginning with IRA account owner who will attain age 70½ on or after January 1, 2020. This was in response to the fact that Americans are currently working and living longer. Congress updated RMD rules to reflect changes in life expectancies.

3. Allowing anyone with earned income the ability to contribute to an IRA after age 70½.

The SECURE Act permanently removes the age limit at which an individual can contribute to a traditional IRA. Previously, an individual could only contribute to ROTH IRAs after age 70½, as they have no age limit. Starting in 2020, the SECURE Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age.

Another notable change the SECURE Act will bring is to 529 Plans. These tax-advantaged 529 plans will be allowed to help pay off qualified student loan repayments (up to $10,000 lifetime).

Many provisions of the SECURE Act will be subject to the interpretation of the IRS or other authorities. As always, clients should consider consulting with their personal tax advisor regarding their specific situation.

Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them.

We firmly believe in proactive tax planning and we will review the SECURE Act for proactive tax planning opportunities and share our findings with our clients.

Our goal is to work with clients to explore efficient ways to drawdown retirement savings and transfer wealth. If you would like to discuss your retirement plan and withdrawal strategy, please call us. As always, we appreciate the opportunity to assist you in addressing your financial goals.

Conclusion

Filing your 2019 taxes will continue to include the new tax rates set forth with the Tax Cuts and Jobs Act (TCJA) enacted in 2018 (currently set to expire after 2025). An essential part of maintaining your overall financial health is attempting to keep your tax liability to a minimum.

When filing your 2019 taxes, the rules and laws currently in place did not vary too much from your 2018 taxes. One of our primary goals is to keep you informed of the changes that will be affecting investors like you. We believe that taking a proactive approach is better than a reactive approach — especially regarding income tax strategies!

How long should I keep my records?

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker dealer and a registered investment adviser. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Note: The views stated in this letter are not necessarily the opinion of through Independent Financial Group, LLC (IFG), and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Please note that statements made in this newsletter may be subject to change depending on any revisions to the tax code or any additional changes in government policy. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount is subject to its own five-year holding period. Investors should consult a tax advisor before deciding to do a conversion. Sources: www.IRS.gov, turbotax.com. Contents Provided by The Academy of Preferred Financial Advisors, Inc 2020© All rights reserved. Reviewed by Keebler & Associates

The post Filing 2019 Income Taxes and Planning for 2020 appeared first on Financial 1 Tax.

The House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act on May 23. The next step is to pass through the Senate and be signed by the President. With strong bipartisan support and the Senate already considering changes for retirement plans, industry expert Bob Keebler, CPA, MST of Keebler & Associates agrees with many reporters who are sharing that this is likely to happen. The act’s goal is to make it easier for small businesses to provide a retirement plan and increase the number of Americans with access to a plan.

Some of the provisions of the SECURE Act that could help Americans better save for retirement include;

• Significantly increasing the tax credit for new company-wide retirement plans from the current cap of $500 to $5,000;
• Allowing small employers that implement an automatic enrollment feature in their retirement plan design to become eligible for an additional $500 credit; and,
• Allowing two or more unrelated employers to join a pooled employer plan, creating an economy of scale that lowers both employer and plan participant cost.

While making retirement plans more available was the driving force behind the SECURE Act, hidden in this bill are some significant changes that all retirement savers should know for planning purposes. Here are some items that are currently part of this bill.

Increasing the RMD age from 70½ to 72

This new legislation calls for an Increase in Age for Required Beginning Date for Mandatory Distributions. Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70½. The policy behind the Required Minimum Distribution (RMD) rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The age 70½ was first applied for retirement plans in the early 1960s and has never been adjusted to consider increases in today’s life expectancy. The bill increases the required minimum distribution age from 70½ to 72.

Allowing someone over 70 with earned income to still contribute to an IRA

One key change that the SECURE Act calls for is a Repeal of Maximum Age for Traditional IRA Contributions. Specifically, this legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. As Americans live longer, an increasing number continue employment beyond traditional retirement age and this allows Americans with earned income to keep contributing to retirement plans after age 70.

A provision in this bill would force the distribution of a retirement account within 10 years for most non-spouse beneficiaries.

A new provision in the SECURE Act could remove most non-spousal beneficiary’s ability to maximize tax-savings through a strategy known as the “Stretch IRA.” The Stretch IRA allows younger beneficiaries like children or grandchildren to take required minimum distributions from the inherited account based on their own much longer life expectancy. This new bill would force a distribution of the account’s value within 10 years of the original owner’s death.

Proactive Tax Planning

Keebler is suggesting that IRA owners talk with their financial professional about proactive tax planning. He feels that it will help tax deferred IRA holders to examine the values of alternative strategies. He encourages these IRA owners to consider proactively planning to minimize taxes when passing on the account to a non-spouse heir, especially if the bill eventually becomes law.

Keebler shares that, “Charitable remainder trusts allow investors to leave assets to a charitable organization and to a beneficiary. In that scenario, your beneficiary would collect a stream of income from the assets for a specified time span. At the end of that period, the charity collects whatever is left.”

Some Reasons Why you might convert a traditional IRA to a Roth IRA

For the right client, Keebler likes the benefits of a Roth conversion. “A Roth conversion refers to taking all or part of the balance of an existing traditional IRA and moving it into a Roth IRA. This is a strategy we think about when the IRA owner is in a lower bracket than their beneficiary”.

Some reasons why you might convert a traditional IRA to a Roth IRA

  Enjoy tax-free withdrawals in retirement.
When taking withdrawals from a traditional IRA, you’d have to pay taxes on the money your investments earned—and on any contributions you originally deducted on your taxes. With a Roth IRA, as long as you meet certain requirements, all of your withdrawals are tax-free.

  Watch your money grow tax-free for longer.
Traditional IRAs force you to take required minimum distributions (RMDs) every year after you reach the RMD required age, regardless of whether you actually need the money. ROTH IRA’s have no RMD requirement, so your money can stay in the account and keep growing tax-free.

  Leave a tax-free inheritance to your heirs.
The non-spouses who eventually inherit your Roth IRA will have to eventually take the money out of a tax-free growth situation (if the SECURE Act passes, this could be within 10 years of your passing) but they won’t have to pay any federal income tax on their withdrawals as long as the account’s been open for at least 5 years.

Deciding whether to convert to a Roth IRA hinges on a variety of issues including what your tax rate is now versus later, the tax bill you’ll have to pay to convert, and your future plans for your estate. Also remember, the conversion will be permanent. Once you convert to a ROTH IRA you can’t revert the money back to a traditional IRA.

Some considerations before deciding include:

• Will you need the money in the first five years? ROTH IRA conversions have penalties if used in the first five years.
• Will you end up in a higher or lower bracket in the future?
• Where will you take the money from to pay the taxes?

This is where a financial professional can offer some help suggestions and strategies. We enjoy talking with clients about the pros and cons of both partial or full ROTH conversions.

Qualified Charitable Distributions (QCDs)

While they are not new to this law, under today’s tax laws and with more taxpayers using standard deductions, Qualified Charitable Distributions (QCD) are a proactive strategy for tax planning for anyone taking a Required Minimum Distribution (RMD). A QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity. It is only available to IRAs and individuals who have reached RMD age (Currently 70½ but may change to 72). Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. This QCD lowers both your adjusted gross income and taxable income, resulting in a lower overall tax liability. It also lowers your income for purposes of seeing if your social security is taxable. By using, or preparing to use, a QCD, you can potentially meet your RMD requirements and satisfy your charitable intents, all while saving money on taxes both today and into the future.

Please note, for tax return filings, your IRA custodian is not required to specially identify the QCD on your annual 1099-R form. The responsibility is on you to inform your tax preparer that you used a QCD. If you don’t let your preparer know, they could report this transaction as fully taxable, which would negate the benefit of your smart planning. Also, the distribution must be made directly to a qualified charity.

Once again, this is a specific area where a professional can offer some help, suggestions and strategies. We enjoy talking with clients about looking into QCDs for anyone over the age of 70.

Final Thoughts on Proactive Retirement Planning

Over your life you may accumulate assets in tax deferred retirement accounts like 401(k) plans and traditional IRAs. You may also have Roth accounts that compound without tax consequences. When thinking about the assets you have accumulated in your retirement accounts, a key issue is tax efficiency. Accumulating assets in a tax efficient way is only one part of the strategy, the other more complex part is withdrawing those assets while making use of the most available tax advantages. The goal is to try to proactively plan the withdrawals from retirement accounts to minimize your tax liability.

The Act would provide some slight flexibility on the timing of some of your RMD strategies since the proposed RMD age will be lengthened to age 72. This could provide another 18 months of time before a mandatory distribution is required.

If the SECURE Act becomes law, in whatever version it becomes, one of our primary goals is to review it for opportunities and then share our observations with clients. We want to always try to provide proactive tax planning ideas when possible.

Determining the most efficient ways to either withdraw or pass to your beneficiaries your accumulated wealth is always an important decision. Our goal is to remain aware of changes that affect our clients and then share those changes with them.

If you would like to discuss your retirement plan and withdrawal strategy, please call us. Our goal is to understand our clients’ needs and to monitor their wealth. Our primary objective is to take the emotions out of decisions for our clients. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you in addressing your financial issues.

Proactive Tax Planning

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. Financial 1 Wealth Management Group and IFG are unaffiliated entities. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Past performance is no guarantee of future results. Independent Financial Group (IFG) does not give tax advice. IFG Registered Representatives (RR) do not give tax advice while acting as an RR. These matters should be discussed with your tax professional.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. Roth IRA account owners should consider the potential tax ramifications, age and contribution limits in regard to funding a Roth IRA. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. RMDs are generally subject to federal income tax and may be subject to state taxes.

The views stated in this article are not necessarily the opinion of Independent Financial Group and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing involves risk including the potential loss of principal. No investment strategy, such as rebalancing and asset allocation, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. This article provided the Academy of Preferred Financial Advisor, Inc. APFA, Inc.©

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