Although next April 15 might seem like a long a time away, right now is the prime opportunity do some strategic 2021 tax planning. And depending on election results, you may want to make changes to your tax strategy this year to lock in the current low rates and gains you have made.
With all that the world has endured in 2020, it’s understandable that many people are longing for a fresh start on January 1, 2021. If you are looking for ways to greet the coming year with some added peace of mind, talk to your financial advisor now about opportunities to reduce your 2020 tax bill.
Along with recommending year-end adjustments to your portfolio, your local Mercer Advisors team can also help you assess how the outcome of the Nov. 3 general election might influence future policy and legislative changes in the federal tax code. Here are some potential moves to discuss with your advisor before flipping the calendar to 2021.
Several proposals within Democratic presidential nominee Joe Biden’s fiscal platform—if enacted by Congress—would require high-earning individuals and married couples to pay more federal tax. Specifics include:
Although none of the above is guaranteed to happen, thinking ahead will allow you to move faster and more confidently down the road, if necessary. Here are five strategies for optimizing your 2020 tax situation.
Given the favorable tax environment right now, you and your advisor might find advantages in “filling up” your current tax bracket with additional income that you can report in 2020. For example, consider:
If the election outcome signals that current limits on itemized deductions are likely to be repealed next year, you might want to wait to incur or pay certain bills until 2021, if possible. Examples include property tax payments, real estate purchases, and non-urgent healthcare expenses. As always, check with your tax professional and do a projection to determine what makes the most sense in your particular case.
Congress created a big deduction opportunity for taxpayers in 2020 as part of the CARES Act. For any cash donations you make to 501(c)(3) public charities this year, you will be able to deduct the full amount—up to 100% of your adjusted gross income (AGI)—on your tax return. Previously, the deduction limit has been 60% of AGI. If you were to make a large charitable donation and do a Roth conversion this year, the tax liability for your Roth IRA contribution could potentially be reduced to zero.
The CARES Act also established a $300 above-the-line deduction for charitable contributions this year. What that means is, if you take the standard deduction on your 2020 tax return, you can also take a charitable deduction of up to $300.
If any of the stocks in your portfolio grew considerably over the course of 2020—such as Apple, Amazon, Netflix, Tesla, and Google—strategically selling some of those shares before year end could benefit your overall tax situation in a number of ways.
You will be paying capital gains at today’s 15% rate (20% for income of at or above $496,601 for married filing jointly) rather than at a potentially higher rate in the future. In addition, if your ordinary income for 2020 is lower—because the CARES Act allowed you to opt out of taking a required minimum distribution from your IRA, or because you retired or were laid off this year—you might wind up with zero federal income tax due on those capital gains if you remain in the lower tax brackets of $40,000 for single or $80,000 for married filing jointly.
Your tax professional and financial advisor can help determine whether the timing is right for you to take those gains this year.
In principle at least, investors want to avoid seeing pieces of their portfolio lose value if possible. When losses inevitably happen, though, you can use them to help offset taxes on your income and on gains elsewhere in your portfolio.
One way to do this is by working with your advisor to strategically sell investments, such as stock, when they decline. Then, by systematically reinvesting in the market as it starts to correct, you can harvest the previous losses in the form of tax deductions on future gains.
Given the possibility that estate taxes could rise, and exemption amounts could fall in the next several years, now is an excellent time to look at options for moving assets out of your estate. However, you probably also want to keep some strings attached to those assets if the current laws don’t change. Here are a few paths to consider:
These strategies for the 2020 tax year each require advance planning in order to complete the necessary groundwork before January 1, 2021. Mercer Advisors has an integrated team of CPAs, tax attorneys, and other experts who can work alongside your local advisor to help lay out an approach that aligns with your overall financial plan.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning documentation preparation and other legal advice is provided through its affiliation with Advanced Services Law Group, Inc.