2020 Year-End Planning Ideas

Post On: December 3, 2020

Posted In: COVID-19 Market Update

Utilize a Roth conversion to take advantage of lower tax rates

The Tax Cuts and Jobs Act (TCJA) made sweeping changes to the tax code, including the lowest income tax rates in decades. Given rising federal budget deficits and the expiration of these tax rates in 2026 (or sooner if Congress takes action), taxpayers may want to consider utilizing Roth strategies now as a hedge against the risk of higher tax rates in the future. For example, contact us to help you determine how much income can be realized within the current tax bracket before “creeping” to the next tax bracket before converting traditional retirement funds to a Roth.


A reminder that required minimum distributions (RMDs) are suspended for 2020

The RMD rules have temporarily changed this year. The CARES Act suspends RMDs in 2020 for account owners, those who have inherited retirement accounts, as well as people who reached their required beginning date (RBD) in 2019 but planned on waiting until 2020 to take their first required distribution.

For taxpayers who are planning on claiming the standard deduction, there are several strategies to consider. For those age 70½ or older, distributing funds from an IRA tax free directly to a qualified charity (up to $100,000 per IRA owner) may be a good option.


Consider tax-smart strategies for charitable giving

When the TCJA was signed into law in 2017, it created a new landscape for tax deductions. By reducing popular deductions and doubling the standard deduction, most taxpayers now opt to claim the standard deduction. This has profound implications for making charitable gifts. Another strategy is the concept of “clumping” multiple years of charitable gifts into one year in order to itemize deductions on that year’s tax return. For example, instead of a couple gifting $10,000 annually to a charity, and not being able to itemize, consider gifting $30,000 in one year, representing three years’ worth of gifts. The couple could benefit from itemizing deductions that tax year and claim the higher standard deduction the next two years. Lastly, the CARES Act makes two changes for 2020. Taxpayers, including those utilizing the standard deduction in 2020, can claim an above-the-line deduction of up to $300 of cash contributions to qualified charities. And, the limit on cash contributions to qualified, public charities increases from 60% of AGI to 100%.


Identify opportunities to harvest tax losses

Are there opportunities to strategically generate losses to offset other gains in your portfolio? If so, use them. For example, using a tax-swap strategy for mutual fund or ETF holdings allows you to realize a tax loss, while retaining essentially equivalent market exposure.


Review beneficiary designations

The SECURE Act, passed last year, eliminates the “stretch” option on distributions from inherited retirement accounts. Under the new rules, most non-spouse beneficiaries are required to fully distribute inherited account balances by the end of the 10th year following the year the account owner dies. This may impact your estate plan.  Review your beneficiaries and set up your estate with an efficient wealth transfer strategy. Remember, charities pay none of these taxes, and life insurance can serve as a tax-free replacement for your heirs. Contact us to learn how this gift can benefit your taxes and a ministry you love.


Year-end gifting strategies using 529s

The annual personal gifting limit for 2020 is $15,000. A special 529-plan exclusion allows five years’ worth of gifts — up to $75,000 or $150,000 for married couples — to be contributed at once. There’s also an added benefit for grandparents who own 529s: These assets are not currently factored as assets for determining federal financial aid under the FAFSA process. However, distributions from these accounts may be counted as part of the income test portion of the financial aid calculation. Lastly, recent tax law changes allow 529 account owners to withdraw $10,000 for K–12 tuition expenses and $10,000 to repay student loans.


Maximize the new 20% deduction for qualified business income (QBI)

IRC Section 199A now allows certain taxpayers to deduct 20% of qualified business income (QBI) on their tax returns. Business income from pass-through entities — sole proprietorships, partnerships, LLCs, and S Corps — may qualify for the new deduction. Business owners at higher income levels ($213,300 for individuals, $426,600 for couples) may be limited or restricted from utilizing the deduction, so strategies to reduce taxable income under these thresholds may be advantageous.


Transform net operating losses (NOLs) into tax-free income with a Roth IRA conversion

Business owners who will record a net operating loss (NOL) this year may be able to use it to their advantage. Unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset any ordinary income, taxpayers can generally apply NOLs against 80% of taxable income. In addition, the CARES Act temporarily suspends this 80% limit for 2020, allowing taxpayers to apply an NOL against 100% of taxable income. Clients carrying forward large NOLs can use those losses to offset the additional income from a Roth IRA conversion.


For those who may have taken a qualified coronavirus distribution, know your options

Under the CARES Act, the 10% early withdrawal penalty is waived for distributions up to $100,000 in 2020 for those diagnosed with COVID-19 — or whose spouses or dependents are diagnosed with it — or those who have experienced adverse financial consequences, such as being laid off or quarantined, due to the pandemic. Income attributed to distributions is taxed equally over 2020, 2021, and 2022 or may be contributed back into a retirement account within three years. Additionally, taxpayers have the option of reporting all of the taxes due in the current tax year in lieu of spreading the income over three years.



2020 was a strange and unpredictable year, but your charitable giving plan can be rock-solid before the calendar turns. Opportunities exist for strategic giving that can give the maximum benefits to your church and the ministries you love. Contact Ambassador Advisors today to put your plan in place and make the greatest impact with the financial resources the Lord has given to you to steward.


Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

Recent Posts

Information Overload?

The major indices ended the week mixed, as investors weighed strong economic and profits data against inflation fears, ongoing supply strains, and a rise in coronavirus infections in some regions. […]

Read More
The Tide Could Be Turning

Stocks retreated from record highs, last week, as investors confronted data showing the highest inflation in three decades. On Tuesday, the S&P 500 Index registered its first decline in nine […]

Read More

Let our professional financial advisors help you achieve the legacy you desire for yourself, loved ones, and organizations. Contact Us