News & Insights
June 26th, 2020

It’s Time to Review Your Tax Strategies

Key Takeaways:

  • Income tax filing deadlines for tax year 2019 have been pushed back to July 15, 2020
  • You have extra time to fund your retirement contributions for tax year 2019
  • Consider making gifts to loved ones as well as charitable contributions with appreciated stock for 2020

Now is a great time to brainstorm tax planning strategies, since this year’s income tax filing deadline has been delayed to July 15, 2020. Some of the ideas mentioned below may help reduce your current tax liability; others may allow you to minimize future tax obligations.


Gifting Appreciated Assets vs. Cash

If you’re interested in gifting to loved ones or favorite charities, it pays to evaluate the more tax efficient way to do so. For example, instead of writing a check to a loved one in a lower tax bracket, it may be better to give an appreciated asset. By doing this, the loved one takes over your cost basis in the security and you avoid the capital gain. The same holds true when it comes to charities. Donations of investments that you’ve owned over a year result in charitable deductions equal to the current market value of the shares at the time of the gift. Plus, when you donate appreciated shares, you escape any capital gains taxes that would have been imposed had you sold the securities. That’s a double tax saver.

Max out Your IRAs

Since the tax-filing deadline for 2019 has been extended, you have a little extra time this year to top off your IRAs. You can contribute up to the LESSER of 100% of your earned income or $6,000 for 2019. Once you reach age 50, contribution limits on IRAs increase by another $1,000. This allows for a “catch-up” contribution for those nearing retirement.

The SECURE Act of 2019 removed the age limit at which an individual can contribute to an IRA. Prior to 1/1/2020, an individual could not contribute after age 70½, this age restriction has been removed. Anyone with earned income can contribute to a Traditional IRA, regardless of age. Please note that this change takes effect for tax year 2020.

Invest Tax-Efficiently

As part of the investment management process, Principle Wealth Partners uses several techniques to help minimize your tax burden, including:

  • Asset location– To reduce tax drag on investment returns, we carefully analyze what type of account, taxable or tax-deferred, to hold investments in, as they generate different types of taxable consequences
  • Tax loss harvesting– we review your account throughout the year, not just at year end, to identify opportunities to offset realized gains
  • Manage capital gains– when selling investments in your account, we take advantage of lower long-term capital gains tax rates, when possible
  • Manage distributions– we work to manage your exposure to income from your mutual fund investments resulting from capital gains, dividends or interest
  • Invest in municipal bonds– when it makes sense for your taxable accounts, we invest in funds whose income is exempt from federal and/or state taxes

Track Deductible Expenses

If your itemized deductions exceed the standard deduction threshold, it pays to itemize. A few of the itemized deductions include: business expenses, charitable donations, education expenses and mortgage interest. The only catch is that you have to keep accurate records to be able to prove the deduction, which also protects you if you’re ever audited. If you haven’t been keeping up with your expenses, it’s a good idea to sit down and get organized. The July 15th deadline applies to deductions for 2019.

Review Your Estate Plan

Your estate plan should be reviewed, periodically, as regulatory rules and your personal situation can change. For example, beginning in 2018, the unified federal estate and gift tax exemption increased per individual from $5 million to $10 million, with annual indexing for inflation. For 2020, the inflation-indexed exemption is $11.580 million, or effectively $23.160 million for a married couple. However, these generous exemptions are scheduled to expire after 2025. For 2026 and thereafter, they will revert to pre-2018 levels, unless Congress takes further action.

These sizable exemptions may mean your estate wouldn’t be subject to federal estate tax if you were to die before 2026. However, gifting more rapidly to loved ones before 2026 might be something to consider. Double-checking the beneficiaries on insurance policies and retirement accounts is suggested on an annual basis.

Ready, Set, Plan

The government is rewriting tax laws as we type. Tax planning can help reduce your taxes and avoid unpleasant surprises. As always, we work to keep you abreast of all tax law changes and minimize the impact to your investment portfolio. If you have any questions, please don’t hesitate to give us a call.

To learn more about these topics, watch my Tax Planning Webinar.

All the best,

John Hannigan