Independent of new tax legislation being debated in Washington at this writing, advisors have myriad ways of helping clients make tax-savvy moves by December 31. Take Roth conversions. “They’re more appealing now than ever because of some of the SECURE Act’s changes,” says Dana Vosburgh, managing director of advisory services at Manning & Napier in Fairport, N.Y.
Signed into law in late 2019, the SECURE Act forces most non-spouse beneficiaries of an individual retirement account to empty it by the end of the tenth year after the account owner’s death. With a large traditional IRA, this relatively short time frame can produce sizable taxable withdrawals for heirs. A Roth conversion forestalls that and turns the account into a tax-free legacy. “Converting money to Roth IRAs, maybe incrementally year-by-year, is something we see quite a bit,” Vosburgh says.
New And Improved Tax Breaks
Roth conversions create taxable income for the client, of course. But philanthropic clients can cut the tax cost. This year only, itemizers may deduct cash donations to public charities of as much as 100% of their adjusted gross income. (Gifts to donor-advised funds, supporting organizations and most private foundations don’t count.) “If you have a client planning to make a large charitable gift, there is an opportunity to do a Roth conversion of the same amount at zero net tax effect,” says Diane Compardo, a partner at Moneta Group Investment Advisors, LLC, in St. Louis.
Clients who don’t itemize can deduct cash contributions to public charities this year, too—up to $300 if single and, in a change from 2020, $600 if filing jointly. “Remind these clients to keep receipts for their CPA,” Compardo suggests.
With the holidays upon us, it’s probably worth informing entrepreneurs that business meals provided by a restaurant are 100% deductible both this year and next, rather than 50%.
Finding Opportunities
Many advisors plan for taxes throughout the year. Still, a year-end checkup is beneficial. “You can see everything that has happened over the year in a single snapshot. There may be things that were missed,” says Brent Lipschultz, a partner at Eisner Advisory Group LLC in Manhattan.
Late-year conversations permit exploring new paths with clients such as investing in opportunity zones, the latest darling of the tax-planning world. Why so cherished?
When certain requirements are met, the client can defer tax on a capital gain that is reinvested into a qualified opportunity fund; the deferral ends in 2026 or when the client’s interest in the qualified opportunity fund terminates, whichever comes sooner. If the client reinvests a capital gain before 2021 ends and holds the qualified opportunity fund for at least five years, only 90% of the reinvested gain will be taxed when the deferral period ends. Appreciation on the qualified opportunity fund investment is tax-free if the fund is held at least 10 years.
“Opportunity zones are a big deal right now,” Lipschultz says.
Private placement life insurance is also prominent in client discussions, he adds. “It’s a way for clients to hold alternative investments in insurance dedicated funds wrapped in a life insurance blanket that grows tax free, with the investment income available tax-free during life and both the income and the death benefit paid tax free at the death of the insured,” Lipschultz explains.
When Change Is Imminent
Also use year-end talks to calm clients nervous about higher federal tax rates next year, whether at the hands of Washington or because the client expects a big 2022. Explain to them the rewards of accelerating income into the current year (i.e., paying tax at a lower rate) and delaying deductions until next year (greater tax savings per dollar of write-off). An easing of 2021’s $10,000 limit on deducting state and local taxes, which was under consideration by Congress at this writing, would provide additional impetus for deferring payment of state estimated taxes until 2022.
Similarly, if the client’s capital-gains rate is forecast to rise, it may be better to harvest losses in January rather than December, says Emily Wood, director of financial planning at Connecticut Wealth Management, LLC, in Farmington, Conn.
Finally, educate clients about the difference between proposed changes and enacted ones and the fact that tax legislation never affects everyone the same way. “It’s important for the advisor to make sure clients understand how they might be impacted and whether there’s any action to take,” Wood says. With clients who are unaffected, “Walk back their fear.”