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Tax Talk

By November 20, 2020No Comments

In the presence of chaos and uncertainty, it is important to set strong filters to separate the noise from actionable items.  One area where taking action can possibly make a difference is taxes.

We will likely have a split government but even if both Democratic senate candidates win their run-off election in January, it will be extremely unlikely to see a major tax overhaul in 2021.  While Trump clearly lost the election, the Republicans did fairly well down ballot which is strong evidence there is no mandate for massive change.  In the midst of all the battles, there is a piece of bipartisan legislation which has a good chance of passing early next year, The Securing a Strong Retirement Act of 2020 (aka SECURE ACT 2). This bill builds on the SECURE Act which was passed in late 2019 with the intention to improve workers preparation for retirement.

Here are some of the key provisions in the bill:

  • Increase the age at which you must begin taking Required Minimum Distributions (RMDs) to age 75 (the age was just increased to 72 from 70 ½ with the passing of the SECURE Act)
  • Allow individuals to pay down student loan debt instead of contribute to their retirement plan and still get an employer match in their retirement plan
  • Allow larger catch up contributions for those age 60 and above
  • Increase automatic enrollment requirements in 401(k) plans which would force participants to take the initiative to opt out of participation if they did not want to contribute to the plan
  • Create more financial incentives for small businesses to create retirement plans through increased tax credits
  • Create an online data base that makes it easier to match old retirement plans with their owners
  • Allow for Qualified Charitable Distributions (QCDs) from qualified plans (currently only allowed out of IRAs)
  • In a break from the rules on Required Minimum Distributions, QCDs can be used starting at age 70 ½.

Items to Consider:

  • If you are over 70 ½ and do not itemize your deductions, QCD’s will likely reduce your taxes.
  • If you are any age and do not itemize your deductions (mostly affects those without mortgage debt), you can use a Charitable Gift Trust account to reduce your taxes on your charitable contributions.
  • Roth IRAs and conversions are very attractive for anyone expecting their future tax rates to increase
  • Estate taxes and gifting will be affected in future years and it is not too early to develop a gifting strategy for those likely to be affected by future limits. Certainly those with a net worth over $10 million should be looking seriously at this now.
  • 529 Education accounts are great tax shelters. In Illinois, each individual can deduct $10,000 from their Illinois taxable income ($20,000 for those filing joint returns).
  • We will be looking for opportunities for realizing tax losses and identifying appreciated assets for charitable gifts. If you have any plans to make special donations this year, please let us know so it can be done in the most tax efficient way possible.
  • Finally, for those who have a PPP loan, while the loan is forgivable, it does appear the IRS will not allow deductions for any expense paid for by the loan. Essentially, the loan forgiveness will be a taxable event. It makes sense to carefully examine whether you apply for forgiveness in 2020 or 2021.

Call us if you have any questions or interest in talking about tax issues.  More to come on the changing investment climate in light of current political events and the surging COVID infections and deaths.