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Year-end Tax Planning for Individuals

As we approach the end of the year, we want you to be aware of specific tax provisions that can help you lower your tax bill and keep more cash in your bank account.  Below we have outlined the top four tax planning strategies we are discussing with our individual clients.  Regardless of where you are in the planning process, please feel free to reach out to Stratus for a complimentary consultation.

  1. Turn IRA Required Minimum Distributions (RMDs) into Roth Conversions: Thanks to the CARES Act, you are not required to take an RMD from your IRAs in 2020.  Since you will not have to make a taxable distribution from your IRA(s), you might consider a Roth Conversion instead.  You will still pay tax on the converted amount, but once it is paid, the money will grow tax free in a Roth IRA and will not be subject to taxes if and when you or your heirs make withdrawals in the future.
  2. Make a Qualified Charitable Distribution (QCD): One interesting provision of the SECURE Act is that while the RMD age was raised to 72, the age for making Qualified Charitable Distributions from your IRA remained at 70½.  Therefore, we would encourage anyone over the age of 70½ to think about making a QCD in 2020.  An IRA owner can make a QCD of up to $100,000 in 2020, which allows the owner to remove IRA funds at no tax cost while continuing to support the organizations they care about.
  3. Combine Charitable Contributions: The only downside to the QCD is that it is only available to IRA owners who are 70½ or older.  However, there are charitable strategies that will benefit all taxpayers, such as lumping multiple years of charitable contributions into 2020.  Because the CARES Act allows taxpayers to eliminate 100% of their income in 2020 through charitable giving (as opposed to 60% in a normal year), making multiple years of gifts in 2020 could help reduce or eliminate your income tax liability.  If you are leery about making a large donation to one organization, think about setting up a Donor Advised Fund (DAF) or Charitable Remainder Trust (CRT). These vehicles allow you to make a large charitable contribution in one year, write off the entire amount in that year, and then make contributions to your charities of choice over time.
  4. Review Your Investments for Losses: As in any year, scouring your investment accounts for assets that have losses is still a good strategy.  Further, because 2020 has been so volatile and the negative effects of the coronavirus have not been evenly shared, you may be holding assets in the retail or leisure industry that have suffered large losses.  Selling at a loss to offset gains elsewhere in your portfolio keeps more cash in your pocket, always a smart move in an unpredictable economy.

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