No one knows who will win the presidential election or how Congress will adjust the tax code in 2021 and beyond. That makes it that much more important that investors take advantage of year-end tax strategies now, high profile advisor Ric Edelman, of Edelman Financial Engines, says.
“Most of our toys have been taken away over the last couple of decades by tax legislation, so there’s not much that’s left. But existing tax law and the CARES Act of 2020, enacted in response to Covid-19, does offer a few opportunities that are worth considering,” Edelman told Financial Advisor.
One bright spot is charitable donations, the financial planning guru said. Even taxpayers who don’t itemize their deductions are allowed to deduct up to $300 in cash charitable donations. Clients that do itemize can deduct up to 100% of adjusted gross income (AGI) for cash contributions.
“We do have a number of clients who are charitably inclined and the ability to donate cash and get a deduction for it is a help to some of our clients,” Edelman said.
If you took a coronavirus-related distribution from your IRA or 401(k), Congress and the IRS gave you some wiggle room. The CARES Act stipulates that while the coronavirus-related distribution is taxable as ordinary income, clients can pay the tax over three years. “You don’t have to pay the entire tax with your 2020 tax return,” Edelman said.
According to the IRS website, “A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.”
The account owner, their spouse or their dependents must have been diagnosed with the coronavirus or hurt financially by the pandemic. This includes parents who couldn’t work because day cares weren’t open.
You also have the option to pay back the money within three years and can file amended tax returns to recoup the tax already paid. Coronavirus distributions are exempt from the 10% penalty that typically applies to early withdrawals.
Another CARES Act opportunity—though it comes with a caveat—involves student loans. The law suspended student loan payments for at least a year and also waived interest on loans, so borrowers are not required to make payments and aren’t getting hit with interest. “But any payments you do make will be applied 100% to principal, so if you have the means you may want to consider making loan payments now so 100% will come off your balance, which is not normally the case,” Edelman said.
He also likes a number of perennial tax moves, especially in the estate planning arena, which may become much more valuable if presidential candidate Joe Biden wins the White House. Biden wants to end the stepped-up basis loophole, which allows someone inheriting property and investments to reduce capital gains taxes. This could have an impact on anyone who thinks they will have a big inheritance coming their way in the future, and it will certainly mean people need to take another look at their estate plan if they’re planning on leaving significant assets to friends and family.