New federal legislation signed in the first 60 days of the Biden administration, combined with other key reforms dating back to 2019, could substantially affect many Americans’ tax strategies and overall wealth management plans this year. Some of the changes related to dependent care, estate taxation, and health expenses are especially pivotal for women as they prepare for retirement.
Given the current tax environment — but also due to broader socio-economic trends — “there is a lot of reason to focus on women and how their financial pictures fit together with their families,” Susan Travis, Managing Director of the Greater Texas Region at Mercer Advisors, said during a recent webinar as part of the firm’s Women and Wealth educational series. For example:
Travis joined with Jamie Block, Director in the Rochester, New York office, and Kara Duckworth, Managing Director of Client Experience, to outline several key legislative developments that women in particular should discuss with their financial advisor.
Signed into law by President Biden on March 11, this emergency relief package authorizes nearly $2 trillion in spending to deliver COVID-19 vaccinations, provide economic stimulus payments to U.S. households, and aid state and community recovery efforts. The American Rescue Plan Act also includes three noteworthy adjustments to the federal tax code:
Travis noted that while the deadline for filing a 2020 federal tax return has been extended to May 17, 2021, due dates for state tax returns may vary. And for people who submit quarterly estimated tax payments to the IRS, the first installment of the 2021 tax year is still due April 15.
“It’s always important to ask your advisor, who can help make sure you stay on top of things,” she said.
The presenters also highlighted several actions that the Biden administration has proposed to Congressional leaders which, if enacted, would change many people’s federal tax obligations. Among these proposals:
“We’ll have to wait and see what happens” with these proposals, Jamie Block said. “You can only plan for what is current right now.” She added that Mercer Advisors teams will be ready to guide clients through any changes that arise.
Along with the recently enacted changes and potential new ones that may develop, Block described how the SECURE Act of 2019 continues to influence Americans’ retirement planning. Key SECURE Act changes included:
One SECURE Act component that created greater challenges to estate planning was the elimination of the “stretch” IRA strategy for passing retirement assets to a person’s beneficiaries. With limited exceptions, someone who inherits the proceeds within an IRA must now empty that account within 10 years. Block and Travis said there are other strategies Mercer Advisors can recommend to clients who want to minimize the tax impact on their beneficiaries from that 10-year deadline.
Options include converting assets from a traditional IRA to a Roth IRA and paying the income tax up front, which results in distributions that are tax-free. Another strategy for reducing the tax burden from a large IRA account is to make a qualified charitable distribution and use the resulting income exclusion to help meet charitable obligations while avoiding income recognition when reaching 70 ½ years of age.
The CARES Act, which Congress passed in April 2020 to provide relief in the early weeks of the coronavirus pandemic, also created significant new tax benefits for making charitable donations. This legislation raised the allowable federal income tax deduction for cash donations to public nonprofits from 60% of adjusted gross income to 100%, opening another avenue for reducing your overall tax liability.
Another compelling reason why tax and retirement strategies are especially important for women is that “we live longer than men” on average, Block said. “There’s a lot of different opportunities that women should be taking advantage of because we live longer, which means we’re going to have more health expenses as we enter retirement.”
Health savings accounts (HSAs) provide a great opportunity to help offset those costs, she said. HSA contributions are not subject to taxes and the funds can be set aside to pay qualifying medical expenses—indefinitely, in most cases. People have until May 17, 2021, to make HSA contributions for the 2020 tax year and reduce their taxable income.
Because the balance can be rolled over from one year to the next and can be invested, HSAs are an excellent savings option for women and men who anticipate higher health care costs as they age. “That gives you a little safety net”, Block said.
In addition, she said, any remaining HSA balances can be passed to a spouse or other designated beneficiary to use for qualifying medical expenses after you die.
The webinar panelists recommended five essential wealth management planning actions:
Want to learn more? Replay our webinar on How Your Wealth Plan and Tax Strategy May be Impacted by the New Administration.
1 “Managing the Next Decade of Women’s Wealth,” Boston Consulting Group, April 9, 2020.
2 “Women and the Great Wealth Transfer,” Investopedia, December 2, 2020.
3 “Financial Experience and Behaviors Among Women,” Prudential Research, July 2010.
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