As investors wind down one of the most
unpredictable years in recent memory, it's wise to consider potential tax
implications stemming from the pandemic and the recent passage of the Coronavirus
Aid, Relief and Economic Security, or CARES Act. Whether it's managing your investment
accounts, deciding whether you'll take your required minimum distribution this
year, or making the most of your 401(k) contributions before January 1, we've
got you covered. Read on for some reminders on how the recent legislative
changes may affect your end-of-the-year tax planning, plus some additional tips
from a few of B. Riley Wealth Management's financial advisors.
Review Your Portfolio with Your
Financial Advisor
If it has been a while since you last
spoke with your financial advisor, give them a call and spend some time
reviewing your portfolio. Check your investment accounts and asset allocation.
Do you have a high percentage of capital too concentrated in a certain position
or area? Determine what's working and what isn't, have your financial advisor
evaluate how much risk you're carrying and, if necessary, have them rebalance
your portfolio based on that information.
Carson Buell, one of our top financial advisors in Dallas, says investors
should obtain a copy of their year-to-date (YTD) capital gains and losses
reports. In assessing how your investments and funds are performing, it's
likely you'll find that some of your holdings have incurred a loss, especially
this year. As an investor, Buell says you are permitted to use any of those
losses to offset any capital gains, plus, if you have an overall net loss, you
can deduct up to an additional $3,000 against your ordinary earned income. Also,
any unused capital losses may be carried forward for additional years,
depending on the circumstances.
Of course, it is important to remember
that there are stringent rules governing the sale of investments, including the
wash sale rule, and this type of movement should not
be done without the assistance of your financial advisor.
Decide Whether or Not You Will Take Your Required Minimum
Distributions for 2020
Under normal
circumstances, if you have inherited money or are 70½ years old (as of
January 1, 2020) and using a retirement account or 401(k), the IRS requires
that every year, you take a certain amount, or required minimum distribution
(RMD), from that account. As an example, let's say you have a traditional
tax-deferred retirement account or
an inherited
IRA (individual retirement account) from
a deceased spouse or parent. The IRS requires you to take out a minimum amount
every year and pay taxes on it, or face a penalty.
However, as the
coronavirus pandemic derailed the economy in the second quarter of 2020,
Congress passed the CARES Act,
which set into motion additional changes to IRAs and required minimum
distributions, the biggest one being the waiver of RMDs for the 2020 tax year.
Still, whether or not you plan to take an RMD this year, it is worth noting
that the SECURE Act,
which was passed in December 2019, extended the RMD age to 72, enabling
investors to contribute to investment accounts and IRAs for an extra year and a
half. If you decide to take your RMD.
Consider A Roth IRA Conversion Plan
What is a Roth IRA Conversion? Based on your
filing status and modified adjusted gross income (MAGI), it's possible you are
no longer eligible for a Roth IRA in 2020. You cannot currently
contribute to a Roth IRA if you make $139,000+ annually as a single person and
$206,000+ if you're married. That said, as part of the 2017 Tax Cuts and Jobs Act, Congress lifted the income limit for
Roth IRA conversions. What that means is, if you are under age 70½ but your income is too high for Roth
contributions, you can
now contribute to a traditional IRA and convert it to a Roth IRA using what is
called the backdoor method.
Roth IRA conversions
have also allowed some retirees to capitalize on the RMD waiver for 2020. Jason Beard and Bob Cellucci, two of our
financial advisors in Philadelphia, note that "because people don't have to take
their RMDs this year, we have clients who are pleased, because in doing so,
they would have inadvertently found themselves in larger tax brackets given
their overall loss of income due to the pandemic. They now have the option of
taking that distribution and converting it into a Roth, which can create an
opportunity to draw from a diverse set of funds and income streams well into
retirement," they add.
Depending on your assets, either of
these conversions may be worth it for you. Check with your financial advisor.
Max
Out Your 401(k) and Employer-Sponsored Health Care Savings Accounts
If you have an employer 401 (k)
account, make sure you maximize contributions, but try not to wait until
December, if possible. It's better to spread them over a full 12 months, so you
can avoid losing out on employer matching. In 2020, the total maximum 401(k) contribution
amount allowed per year is $57,000 with a $19,500 cap on pre-tax contributions.
If you are 50 or older, a "catch-up" amount of $6,500 is also allowed. Just
make sure it happens prior to January 1.
Also, if you have employer-provided FSA
or HSA
plans with remaining funds, do your best to use them because, with few
exceptions, remaining funds will not carry over to 2021. Consider making the
maximum contribution amounts allowed for each during open enrollment, which
ends on December 15, 2020. For HSA plans, the maximum pre-tax amount allowed is
$3,600 for self-coverage and $7,200 for family coverage. For FSAs, the maximum
contribution allowed remains unchanged from last year at $2,750. The more you
can contribute up front, especially for HSAs, which are tax deductible, the
better.
Review Your Insurance Plans, Including Life, Health, AD&D and Short-Term Disability
This applies to everyone, but
especially to investors with employer-sponsored health care and insurance
plans. For example, based on the previous year's medical expenses, should you
switch to a more comprehensive health plan? If you've had a major life change,
such as the birth of a child, a marriage, death of a family member, or a
divorce, go over your health plan, FSA and HSA options carefully. It only takes
one unexpected hospital stay to derail you financially.
JJ Feldman, a financial advisor who helps clients with life insurance plans
in Los Angeles, advises that investors should figure out whether additional
insurance coverage above what their employer provides is needed. "Find out
what's actually covered in employer-offered life, long-term, disability, AD&D, and short-term disability plans. You
may learn that you need supplemental or long-term care insurance in addition to
what you already have, especially as it pertains to life insurance," he adds.
Review
Your Tax Withholdings and Determine If Adjustments are Needed
In early 2020, the IRS made changes to
its online Tax Withholding Estimator, which is designed to help taxpayers
predict what their tax bill may be this year. Are you an employee who needs to
make an adjustment to the amount of money withheld from your paycheck based on
contribution modifications? The new Tax Withholding Estimator offers a paycheck checkup. "If you are a business owner or
self-employed, this tool provides a good way to try and estimate quarterly tax
payments and plan ahead. Plus, the new estimator can now closely approximate
the amount of refunds investors may receive based on customized tax amounts,"
says Rachel Pena, who advises institutional clients in
the greater Nashville area.
Review Your Education Savings Plans
The 529 savings plan is one of the
best ways to save for your child's schooling, and there are many types available,
including 529 plans that will fund K-12 education, college and graduate school.
As a parent, you have ownership of the account and can name your child as the
beneficiary. There are no contribution limits, but if you put more than $15,000
in the account in any given year, you'll have to report it as a gift on your
income taxes. If you're looking to fund your child's future education and can
afford it, there is always an option to superfund a 529 plan.
Make Sure Your Emergency Liquidity Fund is Robust
"If investors have learned anything
from the pandemic, it would be the importance of maintaining a liquid cash
reserve aside from their investment portfolios, retirement accounts, and other
assets," says Lisa Marcelli, a career financial advisor from
Houston who has developed a specialty in guiding clients through various life
changes for decades.
Unexpected emergencies do happen, Marcelli
says, and insurance will cover certain things like temporary disability, but
things like long-term job loss, natural disasters, pandemics, illness, or the
sudden death of a family member can happen outside of what may or may not be
covered. An emergency fund should cover at least six months of living expenses.
There are several considerations when it comes to planning for an emergency
fund, among them age, income, current investments, liquidity, and more, that
you should discuss with your financial advisor.
Review Your Estate Plan
No matter your age or assets, your estate plan is something that should be reviewed
on an ongoing basis, as should your living trust, will, and power of attorney. "If
you've undergone any major life changes over the past year that require changes
in beneficiary designations, like a marriage, divorce, or the death of a spouse
or family member, there are adjustments you can make on your own during employee
open enrollment, but for others, you may need to consult with your financial
advisor as well as some attorneys and estate planning experts who can assist
you.
At least once a year, I remind my clients the
importance of checking their trust funding, reviewing trustee and agent
appointments, and going over any health care directives they may have (along
with powers of attorney) in the rare case they become incapacitated," says David Gurievsky, a B. Riley Wealth Independent financial advisor based in Florida
who assists clients with estate plans.
Prepare Charitable Donations
Charitable giving before the end of the year
can increase your tax savings. Just make sure the amount of money you're
donating will affect your tax bill. Review your itemized deductions
(e.g., deductions for mortgage interest, property taxes, medical
expenses, and of course, charitable contributions). If those deductions are more than the standard deductions, then
charitable contributions may reduce your tax bill. You may want to consider IRA distributions
for charitable donations.
"Taxpayers age 70½ (as of January 1, 2020) or older should also remember they
can exclude up to $100,000 of IRA distributions if those distributions were
qualified charitable distributions," said Mike Gavett, a financial advisor who works with
high net worth clients in Dallas.
As we close out what has been a truly unprecedented year, we hope
that some of these tips and reminders will assist you as you finalize your
financial planning for 2020. By taking these steps, you can expect to start
2021 on a positive note. For more information on maintaining a healthy
financial portfolio, visit www.brileywealth.com
*B. Riley Wealth Management is not engaged in rendering legal,
accounting or tax-preparation services.
Specific questions as they relate to your situation should be directed
to your legal and tax advisors.