Tag Archives: taxes

Posted on

How to make a ROTH Conversion Tax-Free in 2020

Many people know the benefits if they convert their Traditional IRA to a ROTH IRA but are still reluctant to do it because doing so would be a taxable event. There is an opportunity right now to do it tax-free. But you need to hurry.

First let’s review some of reasons to convert a Traditional IRA to a ROTH IRA:

  • Paying taxes at lower rates after retirement
  • NO required minimum distributions from ROTH
  • Lower taxes on Social Security during retirement
  • Lower Medicare premiums throughout retirement
  • Lower tax rates for married couples vs. single
  • Eliminates future tax rate uncertainty
  • Lower Medicare surtax on retirement income
  • Tax free distributions for beneficiaries
  • Estate planning considerations

So how can I have my cake (the ROTH Benefits) and eat it too (avoid the taxes on conversion)? You will need to hurry.

Recall that the CARES Act enacted on March 27, 2020, changed the limitations that are usually placed on charitable gifts. Ordinarily, cash contributions are limited to 60% of your adjusted gross income in the year the gift is made. Recognizing that charities are also hurting from the impact of the virus, Congress modified the limits for 2020. This year, and this year only, the deductible limit is 100% of adjusted gross income.

So the solution can be as simple as converting a portion (or all of) your Traditional IRA to a ROTH IRA and making a qualifying charitable contribution of the same amount. The contribution should not come from your IRA. It will come from your other accounts. To qualify for the higher limit, the gift must be a cash contribution directly to the charity. That is, it cannot be appreciated assets or made to start or maintain a donor advised fund. But you need to hurry and get both done in 2020.

I am making the assumption you itemize deductions on Schedule A of your tax return. Your charitable giving added to your other itemized deductions (medical and dental expenses, taxes you pay, interest you pay, casualty and theft losses, and other itemized deductions) must exceed the standard deduction allowed for your filing status. The standard deduction was increased by the Jobs Act in 2017.

Your financial advisor should be able to prove the benefit of this strategy by modeling various scenarios. We typically model this in two ways:

  • conversion vs. no conversion (status quo) this year
  • conversion with charitable contribution this year vs. next year

As with any significant tax maneuver, you should consult with your own tax advisor / preparer before making either of these moves.

Posted on

CARES Act impacts YOU

As most of you know the CARES Act was signed into law on Friday, March 27.  I attended an extensive Continuing Education session led by one of the nation’s experts and I spent time on Saturday learning more about how this new benefits package might help our clients.

Four provisions for individuals stand out:

Filing deadlines were clarified

  • Tax filing and, perhaps more importantly payments for returns originally due on April 15th and the tax estimates due on April 15th and June 15th have been postponed to July 15th. You do not have to be sick or quarantined for this to apply. It applies to everybody. Furthermore, if you owe taxes, the period between April 15th and July 15th will be disregarded for calculating interest and penalties.  Those will begin to accrue on July 16th if you owe money and haven’t paid by then. You can still extend filing your tax return to October 15th by filing an appropriate extension on or before July 15th.  Contributions to IRAs for 2019 can also be made up until July 15th .

No decision or action is needed on your part in order to take advantage of this postponement.

Checks in the mail

  • It seems the most widely publicized provision of CARES is the “2020 Recovery Rebate for individuals.”  The intent of Congress is to drop money into bank accounts as soon as possible. They will do it electronically if you have had direct deposit of government benefits such as Social Security or a bank link for payment of taxes.  Obviously, the hope is that it will be a relief to families that are hurting from the effects of the virus and that it will flow back into the economy.

To calculate the amount, the IRS will be looking at your 2019 tax return (2018 if you haven’t yet filed 2019).  If you didn’t file a return in either year, but had Social Security income, they will look to your SSA-1099 and determine eligibility from that.  Based on their determination, they will send you $1,200 if you are single or $2,400 if you are married filing jointly, plus $500 for each child under the age of 17.  The rebate is not considered taxable income for 2020 but there are limits to amount of rebate. 

The rebate phases out at certain levels of adjusted gross income. If AGI exceeds $75,000 ($150,000 for joint filers and $112,500 for heads of household), your rebate is reduced by 5% of the amounts over those thresholds. 

It’s important to know that any payment you receive is an advance payment of a credit that will be calculated by your tax preparer and will appear on your 2020 tax return. In other words, the actual credit is based on 2020 income, not 2019 or 2018.  Plan accordingly. We anticipate that we will need to update any previously prepared tax projects as soon as the software catches up with these new laws and certainly before year-end.

Decision needed: No decision or action is needed to receive the money. But remember that there are five things, and only five things, to do with every dollar that comes to you, including this one.  Decide now, even before you get it, whether you are going to use it pay taxes, pay on debt, give it away, save it, or spend it.

Changes to retirement plans

  • Required Minimum Distributions (RMDs) from retirement plans have been waived for 2020, including those who have a required beginning date in 2020.  Additional notices from the IRS have clarified the rules relating to the waiver. For example, you are now able to rollover any RMDs taken this year as long as you do it before August 31. Ordinarily you are only allowed to do one such rollover per year and it must be done within 60 days of the distribution. Both those requirements are waived. If you have a question about that, call us.  
  • Early distributions from retirement plans (typically those made before age 59½) have previously been met with a 10% penalty in addition to the income taxes on the distribution.  Now, individuals can take up to $100,000 coronavirus-related early distribution (typically under 59½) from retirement plans without paying the 10% penalty.  These are available for those diagnosed or whose spouse is diagnosed with COVID-19, or those who experience adverse financial consequences as a result of COVID-19. The distribution will still be treated as income but will be recognized and taxed over 3 years rather than all at once in 2020. The amount distributed can be re-contributed over a three-year period as well. There are exemptions from the withholding rules. Before taking the distribution, consult your tax advisor. We can also assist you with this decision.
  • Loans from retirement plans may become necessary for many people if cash gets really tight due to lack of work. In the past, loans have been limited to 50% of the account balance or $50,000. This has been increased to $100,000 limit and 100% of the account balance. This applies to loans made within 180 days of enactment.

Decision or Action: Strongly consider the impact of taking money out of your retirement account either by loan or distribution.  It is possible that you will miss the recovery of your 401k balance if you take the money out while the market is down.  Have your advisor run new retirement projections to determine the impact.  Weigh all the alternatives.

Charitable contributions deduction for non-itemizers

Charitable organizations need our help now more than ever.  CARES modified the charitable contribution deduction.  First, it provides non-itemizers the ability to deduct up to $300 of contributions from AGI.

For those who do itemize, percentage limitations are eliminated for this year.  The prior limit for contributions was 60% of Adjusted Gross Income (AGI), now it’s up to 100% of AGI; excess contributions can still be carried forward and used in future years. This means that your taxable income can be reduced to zero for 2020 by carefully planning your major contributions to match your AGI. This technique is not available for contributions made to donor-advised funds.

Decision or action: Make a contribution to your favorite charities now for at least $300. They likely need it now more than ever.  Remember to take the deduction next year, even if you don’t itemize.     

Watch for a complete post on the ability to deduct 100% of AGI this year.  It is also a way to make a tax-free conversion of IRA to a ROTH-IRA.   Coming up soon.         

Student loans

As a result of the pandemic, Congress has halted all federal student loan interest accumulation and payment requirements through September 30. Borrowers may continue to make payments during this time, but no financial penalties will apply if no payments are made. If you are in a loan-forgiveness plan (e.g. those working in a not-for-profit organization), these months will count toward loan forgiveness plan as if the payments had been made.

Decision or action: If you have a loan that is not a federal loan, you should reach out to your lender.

As I said at the beginning of this, each member of our firm is hard at work serving clients during this crisis. But we are here for you.   All of us are likely to face challenging decisions in the days and weeks ahead. Reach out via email, call, text or ZOOM.

This post was updated for new information on June 27, 2020.

Posted on

Believe it or not . . . it’s time to plan for 2020 taxes

Of course many people start to think about taxes this time of year since last year’s 1099’s, W-2’s, and other tax documents begin arriving in the mail or inbox. But guess what? Now is actually the time to start thinking about reducing your tax bill for 2020.

Taxes are getting a lot of attention these days. President Donald Trump and his supporters are touting the virtues of the 2017 Tax Cuts and Jobs Act (TCJA) while the democratic candidates who wish to unseat him in 2020 are focused on repeal or other tax generating proposals. Last year was the first year for tax returns prepared under TCJA. AAII quotes a Gallup poll from April 2019, in which they determined that 49% of respondents disapproved of the TCJA. Slightly more than one out of five said that their taxes increased as a result of the act.

It could be that many individuals did not properly plan for the implementation and had too little withheld resulting in a larger tax due or a smaller refund than they had on their 2017 return. We wrote about the impact on paychecks in a blog post in early 2018.


A big reason for the difference in 2017 and 2018 returns was most likely the loss of itemized deductions. That happened for one or two reason: 1) some deductions (e.g. miscellaneous deductions) were eliminated entirely and others were reduced (e.g. state and local taxes) or limited (e.g. interest deduction) for certain filers; 2) the standard deduction was raised to a level that meant approximately 10 million taxpayers earning between $100,000 and $200,000 went from using itemized deductions to taking a standard deduction. We expect to see an even bigger use of the standard deduction this year.

The moral of this story is that effective tax planning does two things for you: 1) it eliminates surprises when you actually file and 2) it gives you a chance to find deductions or adjustments that you might have otherwise missed.

At our firm we utilize a very complete tax planning tool published by Bloomberg. We start the process for our clients by entering their most recently filed tax return. Right now, that would be the 2018 return for most people. Although rare, sometimes we are able to catch mistakes made in the preparation of that return and can advise the client to file an amended return. (It’s always a good idea to catch AND CORRECT your own mistakes before the IRS does.)

We don’t prepare returns, but when the 2019 data become known, we can setup the projection to show the impact for last year. We like to do that even before you turn your data over to your tax preparer. That will give you an estimate of what to expect. One client, after seeing our projection, went back home to hunt for more deductions. Of course, if we are managing the investment assets, we already have the interest, dividends, and capital gains and can plug in the actual numbers to make the projection more accurate.

After setting up the tool with the previous return, we have a good idea about what to expect for the current and next year. We project at least two years into the future (currently 2020 and 2021) in search of tax saving ideas.

We also model different cases to reflect the impact of each of those ideas. Some alternative cases can be combined for even more tax savings.

While we are on the subject of taxes, we have a resource for you to download if you like. It is a two-page listing of relevant tax data for 2020. I have also included the 2019 data for comparison and to assist you in preparation of your return. The download is free.

Click here to request the 2020 Key Financial Data resource kit.

If you would like to consider this kind of tax planning while you’re gathering your 2019 data, drop us a line or give us a call.

January 3, 2020