The following was written by Justin Meade, a private wealth advisor in the Greenville, South Carolina office of Ronald Blue Trust.
Why should you address income tax issues in November? All too often we are focused on the “tax preparation” deadline of April 15, but sadly, at this point, it’s probably too late to develop the most effective tax plan. Below are some scenarios to consider before the “tax planning” deadline of December 31:
- Perhaps you received a lump-sum severance payment, sold a highly appreciated asset, or just plain made a lot of money this year. Consider “prepaying” or “lumping” current and future charitable donations into a donor-advised fund. With these accounts, you generally are allowed an immediate tax deduction, but the donor can spread the donations to multiple charities over multiple years. This strategy can be highly effective if used correctly.
- Maybe the opposite income scenario is the case, and you have lower-than-expected income compared to future years. Consider distributing and realizing more income from your tax-deferred accounts or even converting regular IRA funds into a Roth IRA.
- Taxpayers in the 12% or lower federal marginal income tax brackets can take advantage of 0% federal long-term capital gains rates for 2020. Even if you plan to continue to hold an appreciated security, you can take advantage of this strategy. First, you need to sell your position to realize the gain. Assuming you still want to own the stock, you immediately repurchase the same stock. You will realize the gain at the 0% capital gains rate. Plus, since you repurchased the stock at the current higher price, you also increase the cost basis, which should reduce the gain on a future sale. It’s a win-win situation. Note that this strategy could potentially affect the taxation of your Social Security benefits, so be careful.
- Another strategy to utilize inside your brokerage account is capital-loss harvesting — selling a security that has decreased in price since original purchase. A realized capital loss can offset current capital gains or even provide you a deduction of up to $3,000 against taxable income. Be careful regarding the “wash sale” rules when it comes to deducting losses. The IRS makes you wait 31 days before you can repurchase a security in which you realized a loss.
- With any tax plan, it’s a good idea to double check your current withholdings and estimated payments with your estimated tax for the year. Running a quick tax analysis late in the year will reduce the chances of being surprised with a large tax bill come April. This also allows you to make an estimated payment to Uncle Sam to help avoid a penalty for under-withholding!
At Ronald Blue Trust, we believe that the best tax planning is done throughout the year. All of the above strategies and recommendations have to be done by year-end to count for 2020. Please contact your tax preparer or financial advisor to determine if any of the above strategies could be appropriate for you. If you need assistance and would like to talk to a Ronald Blue Trust advisor, please call 1-800-588-7526 or email us using the form below.
