Greetings from Harbour Capital Advisors,
As 2020 draws to a close, it’s clear that none of us had any idea in January what this year would bring. I imagine many are looking forward to a reset in 2021 with hopes of a coronavirus vaccine on the horizon and an eventual return to something closer to normal life. The presidential election, which had seemed to presage significant tax law changes one way or the other, has now left us in a state of limbo that won’t be resolved until after year end. But amidst all the change and uncertainty this year has brought, the truth remains that one of the only sure things in life is taxes. With that in mind, we highlight a few new tax opportunities for 2020 along with reminders of time-honored year-end planning ideas to consider as you wrap up 2020 and head into 2021. In addition, please take a look at the attached chart of “Selected Tax Rates and Thresholds for Tax Years 2020 and 2021” as you consider your end-of-year planning.
New for 2020:
1. No Required Minimum Distributions (RMDs) for 2020. The CARES Act waived the requirement to take RMDs from retirement plans in 2020. If you have not already taken your RMDs this year and do not need the money currently, consider lowering your 2020 income by not taking a distribution. This waiver also applies to inherited IRAs.
2. Changes to IRA Age Limits. The SECURE Act eliminated the age limit of 70 ½ for making contributions to a traditional IRA, allowing taxpayers to continue to contribute so long as they earn compensation. It also extended the beginning date for taking RMDs from a traditional IRA to 72, meaning that an IRA owner must take their first RMD in the year they turn 72 or by April 1 of the following year (in which case two RMDs would be required in that year).
3. Charitable Deductions. The CARES Act introduced a new charitable deduction for taxpayers who do not itemize deductions. An individual taxpayer who does not itemize can deduct up to $300 of cash donations made to a public charity in 2020. For taxpayers who do itemize and want to make a very large charitable donation, the CARES Act permits a deduction up to 100% of your adjusted gross income (AGI) for cash donations made to public charities in 2020. Neither deduction is available for gifts of appreciated securities or gifts to a DAF or private foundation.
4. Qualified Charitable Distributions (QCDs) continue to be effective. Although RMDs are not required this year, it remains possible for a taxpayer over 70 ½ to make charitable donations up to $100,000 directly from an IRA to a public charity. Although not needed to offset RMD income in 2020, a QCD still has the advantages of avoiding inclusion of the donated amount in income (yielding a result similar to a charitable deduction but without the need to itemize deductions) and lowering future RMDs by depleting your IRA balance.
5. Intra-Family Loans. While not a new concept in 2020, historically low interest rates make this an unusually favorable time to consider making or refinancing loans to family members. For example, for a loan made in December 2020 with a term of between 3 and 9 years, the rate you must charge to avoid gift and income tax issues is only 0.48%.
6. Fund 529 plans. Funds in a 529 plan grow tax-free; withdrawals are tax-free so long as they are used for approved educational expenses; and some states give a state tax deduction for 529 contributions. This popular option for making gifts to children and grandchildren has had some recent expansions. In addition to college and graduate school tuition, you can now use a 529 plan to pay up to $10,000 per year for elementary or secondary school tuition. New in 2020, a 529 plan can also be used to repay qualified education loans of a plan beneficiary and the beneficiary’s siblings up to a lifetime limit of $10,000 per person.
Other Year-End Planning Tips:
1. Bunch charitable deductions and consider donating to a donor-advised fund (DAF). Given the current large standard deduction and limited itemized deductions, some people may benefit from bunching deductions, i.e., accelerating deductible expenses into one year in order to itemize in that year, and reverting to the standard deduction the next year. Charitable giving presents the most obvious opportunity for bunching deductions. Depending on your circumstances, you might consider making several years’ worth of charitable donations in a single year, then refraining from giving to charity for the following year or two. A donor-advised fund (DAF) is a specific vehicle that several of our clients have used to effectively bunch charitable donations.
2. Bunch other deductions. Another area where bunching deductions may remain feasible, if all conditions are met, is accelerating payment of medical expenses, which remain deductible in 2020 to the extent that they exceed 7.5% of adjusted gross income. This threshold is currently scheduled to rise to 10% in 2021.
3. Harvest tax losses. Minimize taxable capital gains by selling underperforming assets to generate a capital loss that you can use to offset capital gains. Harbour Capital Advisors actively harvests losses in its client portfolios. If you have specific questions regarding your year-to-date realized gain/loss position, please give us a call.
4. Maximize retirement plan savings. If you haven’t made the maximum contribution to your workplace retirement plan or IRA, consider increasing your contribution. If you are 50 or older you are eligible for an added catch-up contribution amount annually. Contributions to a 401(k) must be made by the end of the year, but you can make a 2020 contribution to an IRA until April 15, 2021. See the attached chart for contribution limits for 2020 and 2021.
5. Make gifts. The annual exclusion from the gift tax for 2020 remains at $15,000 per person per donee. In addition, paying qualified educational and/or medical expenses in any amount on behalf of another person directly to the provider of the services is not treated as a gift for tax purposes. Taking regular advantage of these opportunities each year is a simple and effective way to pass assets to your loved ones without tax implications.
6. Fund a Health Savings Account (HSA). For those with a high-deductible health plan, an HSA is a triple tax-advantaged opportunity – contributions are tax-deductible, withdrawals to pay qualified medical expenses are tax-free, and interest earnings are tax-free if used for qualified medical expenses, but tax-deferred in any event.
7. Use your Flexible Spending Account (FSA). If you have an FSA that requires that all funds be spent in the current year, be sure to use those funds before December 31.
If you are interested in learning more about these or other year-end tax-planning strategies, please get in touch; we would be happy to discuss. In the meantime, we hope that the attached charts of current and future tax rates may help you assess your tax picture and plan for the coming year.
Elizabeth Hefferon, Family Wealth Advisor
Harbour Capital Advisors, LLC (“HCA”) is neither an attorney nor an accountant, and no portion of the content provided herein should be interpreted as legal, accounting, or tax advice. The tax information contained herein is general in nature and is provided for informational purposes only. HCA does not provide legal, tax, or accounting advice. HCA cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on preand/or after-tax investment results.Harbour Capital Advisors, LLC (“HCA”) is neither an attorney nor an accountant, and no portion of the content provided herein should be interpreted as legal, accounting, or tax advice. The tax information contained herein is general in nature and is provided for informational purposes only. HCA does not provide legal, tax, or accounting advice. HCA cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on preand/or after-tax investment results.