2020 Year-End Tax Planning for Retirees

By JoAnn Huber

November 24, 2020

2020 Year-End Tax Planning for Retirees

Dean Barber: Hey everybody, I’m Dean Barber, founder, and CEO of Modern Wealth Management, along with JoAnn Huber, CERTIFIED FINANCIAL PLANNER™ and CPA. We’re nearing the end of 2020, and I know many of you are thinking, “Thank God! Bring on 2021! Let’s get rid of 2020!” 

Typically, this time of year is when we tell you all that this is the most critical time to get ready for next year’s taxes. In the following year, we want to look forward to three, four, or five years to help reduce taxes.

We’ve said this many times that as long as you live in the United States and as long as you have money or make money, taxes will be a factor in your life. In this year-end tax planning discussion, we’re talking about helping people not pay as little 2020 tax as possible but as little tax as possible over their lifetime. 

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Podcast: What Retirees Need to Know About Roth Conversions

Year-End Tax Planning is Different in 2020

Dean Barber: Generally, we put out an article called Year-End Tax Planning for Retirees for the end of the year. Some things have changed this year, though.

JoAnn Huber: Things are a little bit different this year. Not only are we facing a global pandemic, but because of that, they’ve made tax law changes that may give people a different situation this year.


2020 Year-End Tax Planning
on America’s Wealth Management Show

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2020 Year-End Tax Planning
Links Mentioned on this Episode

Complimentary Consultation Podcast: What Retirees Need to Know About Roth Conversions

Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host Dean Barber, along with Bud Kasper and special guests with us, also is JoAnn Huber.

Bud Kasper: Yay!

Dean Barber: Yay!

Bud Kasper: Finally, back!

Dean Barber: Well, here we are, December 2020.

Bud Kasper: I know. Now we’re counting down Christmas.

Dean Barber: You know-

Bud Kasper: First, we counted down the election-

Dean Barber: No, no, no, we’re not counting down to Christmas. We’re just saying, “Get us the hell out of 2020, please.” Everybody’s thinking, “Just let me close my eyes, open them up, and 2021 will be here.”

Bud Kasper: Yeah. No doubt.

Dean Barber: Just get me out of this mess. 

Bud Kasper: You what I think about with that is once the vaccine is out and well distributed, you know how busy it’s going to be? I mean, stores will be packed, airlines will be packed as well. 

Dean Barber: It can’t come soon enough, in my opinion.

Bud Kasper: Yeah.

Dean Barber: There are a lot of things out there! The reason I bring that up is not to talk about COVID-19, not to talk about the economy or anything like that, but people are so worn out right now, and they are only thinking about, “Just get me out of this year. Let’s move me into 2021. Things will be different. It’ll be a new year.” 

Taxes in December?

But before we get there, we want to talk about something critical this time of year. It’s not a shopping list, and it’s not what are we going to make for Christmas dinner, or what are the travel plans? It’s taxes. I know it’s crazy to think about taxes in December, but JoAnn, December is perhaps your third busiest month behind March and April. Right?

JoAnn Huber: Absolutely. And I don’t think most people realize how busy it is at the end of the year for taxes. And that’s the time that people need to be looking at things because this is your last chance.

Bud Kasper: And it isn’t necessarily on the returns. It’s on the preparation for not getting taxed next year.

Last Chance to Impact Your 2020 Taxes

JoAnn Huber: Well, this is where the planning happens. And this is your last chance if you’re going to do something to impact your taxes, there are very few things you can do after December 31st. So you should ask yourself, “What should I be doing between now and the end of the year?”

Bud Kasper: Yet we know that people aren’t thinking about that, are they, Dean? 

Dean Barber: No, it’s the last thing on our minds right now. Good tax planning, proactive tax planning generally starts in January. So it’s December now we’re finishing up what we planned in January and February, and also in December, we’re beginning to etch out our plan for 2021. 

Then in January of 2021, that’s when we finalize, okay, this is how we’re going to get our money this year. This is where we’re going to make our deposits and how we’re going to give away to charities. This is our plan.

Chances of New Tax Laws Are Very Real

As you go through the year, as witnessed by 2020, there can be multiple tax code changes, and we have a new administration coming in. So the possibility of new tax laws in 2021 is very real. 

JoAnn Huber: They are.

Dean Barber: Right?

JoAnn Huber: And I think we’ll have a better idea once we know what happens in Georgia with the Senate elections.

Dean Barber: That’s going to linger into 2021. If you haven’t already done some planning for 2020, it’s going to be tough to get a lot of things done this year. But the great thing about tax planning is it’s an ongoing process.

We can help you get organized and plan for the future. Get a complimentary consultation by clicking here.

We’ve said this many times, “As long as you live in the United States and as long as you have money or make money, taxes are going to be a fact of life.” 

Even if you didn’t get something done in 2020, and it wasn’t the right thing, now’s the time to start looking at 2021 and beyond. And we can start focusing on the future and put 2020 in the rearview mirror.

Bud Kasper: I think it’s important for people to understand that, as advisors and planners, we have gone through a metamorphosis in the sense that we are focusing on taxes more than ever before. We realize how critical it is to the financial outcome of our clients.

Every Financial Decision Will Impact Your Taxes

Dean Barber: Well, JoAnn, there’s almost not one thing that people do in their financial lives that doesn’t at some point get onto the tax return.

JoAnn Huber: Right. And that’s what I tell people repeatedly because every financial decision is somehow going to impact your taxes. And maybe it’s not that that actual decision will be on the tax return, but it will trigger something else that will cause something to be taxable or deductible.

Bud Kasper: How many people out there don’t have these relationships with accountants? All they have is a relationship with a financial advisor who doesn’t necessarily have the expertise, nor do they have the capability of actually making tax assessments. 

Dean Barber: That’s an issue, JoAnn.

“I have an easy question for you.”

JoAnn Huber: It is. And it’s incredible to me how much people don’t understand. Somebody called yesterday and was like, “I have an easy question for you.” I’m like, “Okay, what is that?” “Well, do I take a distribution? Do I take money out of my traditional IRA or my Roth IRA?” I’m like-

Dean Barber: That’s not an easy question.

JoAnn Huber: Nope, but in his mind, it’s just straightforward. I think many people have that misconception that it’s just a really simple thing. However, without having a complete financial plan and knowing what you’re trying to do now and in the future, you really can’t make that decision. Well, I guess you can make the decision, but it might not be the right decision.

Dean Barber: Right. But what winds up happening there, JoAnn, is people make a decision, and they look only at the current year’s consequences. And that’s where the mistakes come in is they’re not thinking about the ripple effect of that decision in years to come. 

JoAnn Huber: That’s where it goes back to what you were just saying that every financial decision does impact your taxes at some point. And if you make a wrong decision today, are you going to overpay your taxes in the future?

Dean Barber: No, we know you are. We see it all the time.

JoAnn Huber: All the time.

Dean Barber: I encourage you to get your complimentary consultation by clicking here

Dean Barber: We know that it’s the Christmas season, and everybody wants to start thinking about all the great things, and we want to get 2020 behind us and move into 2021, but there are some things, JoAnn, that people need to be thinking about right now as it pertains to their taxes. 

Required Minimum Distributions

Let’s start with our older generation. Of course, now we have some of the baby boomers that we can say are in the older generation because they are over age 70 1/2. Suppose they were over age 70 1/2 by January 1st or over 72 this year. And why do I say that? Because we had a screwed up tax code that changed the required minimum distribution date from 70 1/2 to 72, but if you were already 70 1/2 by January 1st, you don’t get to use that 72 age.

JoAnn Huber: Right. But then it ended up being even more confusing because of the CARES Act that came in and said you don’t have to take a required minimum distribution this year.

Dean Barber: Right, and of course the CARES Act is, we’ll call it the bailout package or the stimulus package that Congress put in place due to the COVID-19.

JoAnn Huber: Right.

Dean Barber: Right. So the required minimum distribution is what we’re talking about, and it’s also affectionately called the RMD. I like to think of it as Uncle Sam tapping you on the shoulder, saying, “Hey, I’m tired of waiting on you to die to get my share of that. Start taking some out so you can send me some of it.” That’s exactly what’s happening there.

It’s the Taxman!

Bud Kasper: You talk plain, Dean. You talk plain.

Dean Barber: It’s the taxman. Come on, Bud. I’m tired of waiting for you to go. Give me part of my money.

JoAnn Huber: It’s time.

You Don’t Have to Take Your RMD in 2020, But Should You?

Dean Barber: But the reality is that IRA is not your money. Not all of it. And only part of it is. And so this year, you don’t have to take that required minimum distribution if you’re of an age where the requirement of distribution has been something that you’ve had to do. You don’t have to do it. And so a lot of people are just stepping back and going, “Oh goody, I don’t have to take that this year. Well, that means I don’t have to send as much money off to Uncle Sam,” but the real question becomes should you anyway? And JoAnn, don’t say it depends, because that’s always your answer. 

JoAnn Huber: Well, I’ve seen more people this year, when we’re making projections, that are going to have negative taxable income. Because they don’t have the required minimum distribution, and they don’t have taxability of their Social Security because they don’t have the distributions, and they’ve been living off of their taxable account. And so if they have negative taxable income, they’re leaving money on the table and saying, “Here, IRS. Just keep that. I’m glad that you’re going to do that.” So that’s where people need to look and say at least get to break even. 

Dean Barber: So at least take enough out of that IRA so that your taxable income equals your standard deduction.

JoAnn Huber: Right. Then the question has to be, “Well, if I’ve taken that much, should I take a little bit more?”

Bud Kasper: Yeah. And the answer is probably, as long as you stay in the 12% bracket, right? 

JoAnn Huber: Right.

All About the Brackets

Dean Barber: We’ve had so many instances that you and I have looked at together, and I know you’ve been working with Bud and all of our advisors here at Modern Wealth Management looking at our clients, but we look at so many scenarios where we can say, “You know what? We can get money out of an IRA this year at a 12% bracket, and we know that next year it’s going to come out in a 22% bracket. Well, it’s almost like a 50% discount on my taxes. Okay, I’ll take it.”

JoAnn Huber: Right. So if you went into the store and you saw something on sale that you wanted for that, wouldn’t you be all over it? And I mean, it’s the same way with taxes.

Bud Kasper: Yeah. You don’t even have to wait until Black Monday, or Friday, or whatever it is. It’s Black December. It’s just constant. 

Roth Conversions

“The Roth IRA, I think, is the best piece of legislation ever written because once you put your money into it, it starts growing tax-free. It accumulates tax-free, and then it comes out and distributes tax-free either to you or to your beneficiaries.

– Dean Barber

Dean Barber: Yeah, no doubt. But that’s been the deal with taxes this year, especially because of this RMD, is that people have had an opportunity throughout the entire year to think about should I take my RMD? And what we’ve been doing with a lot is saying, “You know what? If we don’t have to take the RMD, let’s take what we can, get up to the top of that bracket that you’re in today, and let’s convert that over to a Roth IRA.” 

Of course, the Roth IRA, I think, is the best piece of legislation ever written because once you put your money into it, it starts growing tax-free. It accumulates tax-free, and then it comes out and distributes tax-free either to you or to your beneficiaries. So you pay tax on it once to get it in, and then forevermore, it’s tax-free. If I could get everything I had into a Roth IRA, I’d do it tomorrow.

The Seed or the Harvest

Bud Kasper: Yeah, but we know that the government is quick to put their hand out, and they created it so they could get some fast money that way. But if we use it, if we’re smart about this, we can postpone that. And I always use the saying that, Dean, you and I were familiar with many years ago, and that is either pay tax on the seed or tax on the harvest. Pretty simple.

JoAnn Huber: And what we’re trying to do is say, “when will my tax be the least amount? Is it going to be when it’s the seed or the crop?” 

Bud Kasper: Correct.

Changing the RMD Age?

Dean Barber: And now, there also are some discussions going on in Congress right now to muddy the waters just a little bit more about potentially changing that required minimum distribution age to 75 as opposed to 72. Has anything come out from the IRS about that?

JoAnn Huber: I haven’t heard much about that. One thing that did happen earlier this week is they did release the new requirement or the life expectancy tables, I think is what it’s called, but those are not effective until 2022. But that will make a difference and reduce the amount people have to take starting in 2022. And people need to be careful in 2021 that they’re using the right table.

Dean Barber: So is the divisor larger in that new table so that the draw percentage is smaller? Is that what’s happening?

JoAnn Huber: Yes.

Dean Barber: Interesting.

JoAnn Huber: Because people are living a little bit longer.

Bud Kasper: But that makes a lot of sense, though. They’re late to the party in terms of having that happen. We saw it when we had full retirement age increase; now we have the 72 and maybe 75. I just don’t think 75 is realistic in terms of the amount of capital that the government needs to postpone.

JoAnn Huber: That’s where I’m at with you, Bud, as I don’t think they’ll postpone it because they don’t want to be patient anymore and wait for their share of your retirement account. 

Bud Kasper: Yeah, what do we call it? The money grab, Dean?

The SECURE Act and Changing the RMD Age

Dean Barber: Wait a minute, though, the SECURE Act fixed all that. That’s why they can do this. Think about it from a perspective of if somebody dies now with more money in their IRA, what happens? All of it comes out. It’s not a little required minimum out; it’s all got to come out now when it passes to the beneficiaries within ten years. 

So I don’t think, “Oh, they’re being nice.” No, they’re not being nice. And the whole SECURE Act was the biggest bunch of B.S. I mean, it’s horrible. We did an entire video on the SECURE Act, and we’ve had to adjust a lot of our estate planning due to the SECURE Act. Look, here’s the thing, taxes have gotten more complicated in the last 24 months than they were prior. And there was no simplification of the tax code. It’s more complicated.

The more complicated it becomes, the more opportunity you have to take advantage of the tax code’s new provisions. You need to understand what those are. You need to learn about that. Watch our video on Year-End Tax Planning for 2020, and request a complimentary consultation. Look, we need to sit down and talk about what you’ve got going on because if we can understand your financial picture from a CPA’s point of view with a financial plan in place, the amount of taxes you can save over your lifetime will blow your mind. You can watch the video and set an appointment right there on the website.

Back to the SECURE Act 

JoAnn Huber: I want to go back to what you were talking about, the SECURE Act, and you talked about how it made it, so we had a lot of estate planning changes that happened. It also has a lot of tax planning changes.

Dean Barber: For sure.

Estate Tax Exemption

JoAnn Huber: And so we always talk about, when we’re doing tax planning, we want to do 10, 15 years and say, “What does it need to be?” But with the SECURE Act, we’re now doing a lot of multi-generational planning. And we have to look at that because, with the estate tax exemption amount where it is right now, which is about $11.6 million, I believe, then most people aren’t going to have an estate tax issue; they’re going to have an income tax issue.

Bud Kasper: Yeah, but you want to bet where that $11.6 million stays.

JoAnn Huber: Right, but let’s face it, there’s still going to be the tax. The income taxes are the crucial part because if we can save money on the taxes, we can work around estate taxes. There’s always the estate planning we deal with, but what do we do now to minimize the taxes?

Planning Has to Be Early

Bud Kasper: But that planning has to be early.

Dean Barber: Oh, for sure. I mean, it’s not one of those things where, “Hey, Uncle Joe, he’s in the hospital, he’s got three weeks to live. Let’s get an attorney in there and draw up a will real quick.” That’s not how this works. 

JoAnn Huber: No, that’s not planning. That’s just making sure things can transition easier.

Dean Barber: Yeah, and when I talked about how it’s changed the estate planning, JoAnn, I wasn’t talking about estate taxes, I was talking about the plan on how you’re going to distribute money to the next generation.

JoAnn Huber: Which ties right into the taxes.

Dean Barber: And it’s all about the taxes. It’s all about keeping Uncle Sam’s greedy little fingers out of your pot of gold. Ensure that it goes to the people you love and the people you care about, not to Uncle Sam. Look, there are ways to do it. 

Bud Meets Johnny Cash

(Music Playing: After Taxes by Johnny Cash)

Dean Barber: That’s Johnny Cash, After Taxes, right? That’s what we all think about is, what are we going to keep after taxes? 

Bud Kasper: You know, I ran into him. 

Dean Barber: Did you?

Bud Kasper: I was at a Denver airport. I don’t know if I was skiing or something. Anyway, I went into a gift shop, and I was looking at some jewelry or something. All of a sudden, this shadow came over my right-hand shoulder, and as I made a slow turn to my right and continued to go up, because he’s a pretty tall guy, totally dressed in black, Johnny Cash right there. He was buying some sort of a Native American made bracelet for himself, so anyway, it was nice.

Dean Barber: What year was this?

Bud Kasper: Oh, gosh, I don’t remember.

JoAnn Huber: But he remembers meeting him.

Bud Kasper: Yeah, it was December. 

Dean Barber: Back in the day. 

Bud Kasper: Back in the day. 

JoAnn Huber: You don’t celebrate the anniversary every year? 

Bud Kasper: No. He went outside and got on his horse and ran and took off. That’s the last I saw of him. Johnny. 

Dean Barber: Oh, I didn’t know we were going to go down that road, but okay. It has nothing to do with taxes, but it’s nice to know that you met him.

Bud Kasper: Yeah. He’s from Texas. (sounding like “taxes”)

Dean Barber: I thought he was from Tennessee or something. 

Bud Kasper: No.

Dean Barber: I have no idea where Johnny Cash is from. 

Bud Kasper: I didn’t either, but I had to make it rhyme some way so. Okay. 

The Tax Cuts and Jobs Act & Charity

Dean Barber: Well, all right, so we’re talking about year-end tax planning strategies for 2020. We’ve talked a little bit about Roth conversions, RMDs, and the RMD age increase. 

Let’s talk a little bit JoAnn about how people are giving to charity now. One of the things with the Tax Cuts and Jobs Act. We get tax code changes to the standard deductions so that most people aren’t itemizing any more. Therefore, they’re not getting credit for their charitable giving as they did before. In a lot of cases, it’s not deductible unless you’re giving pretty sizable amounts.

JoAnn Huber: Right, and there is one little difference this year that, if you donate to charity, you can take $300 as a deduction as an above the line deduction, so you don’t have to itemize if you get that. 

Dean Barber: Oh, boy.

JoAnn Huber: It’s going to make a big difference.

Bud Kasper: Free $300, yeah.

Dean Barber: Look, honey, a quarter, pick it up.


JoAnn Huber: They’re trying to encourage people to give to charity, but I think that’s just one of those little things to make sure people are reporting all of their charitable giving and taking advantage of it. Because even though it’s not much, it will make a little bit of a difference, but we want to look at the bigger picture and say, “How should you be giving your charity?” There are a few different strategies that we talk about depending on your age. If you’re under age 70 1/2, bunching of your charitable giving is one thing. 

What we mean by that is, by giving two or three years’ worth of charity in one year, so you take the standard deduction, the years you don’t give. Then the year you give that large deduction to charity, you take the itemized deduction, and there are different ways people can do it. 

Donor-Advised Funds

JoAnn Huber: Sometimes we’ll set up a donor-advised fund, which the benefit of that is, you get the deduction the year the money goes in. But then you can distribute the money out to the charity you want over multiple years.

Bud Kasper: If you’re planning and you knew that you had a tax event in one given year, bunching could help you?

JoAnn Huber: Right, so for example, say you get a really big bonus this year, and you want a deduction, but you don’t want to give it all to charity, you can set up a donor-advised fund and put the money in the donor-advised fund. Then in the next few years, you can just distribute it out to charity.

Bud Kasper: While getting that current year benefit?

JoAnn Huber: Yeah, so you get the large deduction this year to offset your income.

Practical Ways to Use Donor-Advised Funds

Dean Barber: Let’s talk about some practical ways to use that donor-advised fund, because let’s face it if you’re in the airline industry, if you’re in the foodservice industry, travel industry, anything like that, energy industry, you’re not going to get bonuses this year. 

So you’re not going to try to offset that, but if you know that you’re going to give to charity, and let’s say that your annual gifting is $5,000. All right, let me give ten years’ worth of my annual gifting to a donor-advised fund, so I’m going to put $50,000 in that. Now that $50,000 I get to use as a deduction the year that I put it in the donor-advised fund, right? 

JoAnn Huber: That’s right.

Dean Barber: Can I now take some of my IRA and convert it to a Roth IRA? Then have that deduction offset that conversion to get some of that money from my regular IRA to a Roth IRA without paying any taxes on it?

JoAnn Huber: You can.

Dean Barber: There you go.

JoAnn Huber: That’s the kind of thing we’re looking at.

Bud Kasper: Now that’s planning.

Dean Barber: There you go.

The CARES Act and Donor-Advised Funds

JoAnn Huber: You have to be aware that there are income limits on the amount you can take as a charitable deduction. But this year, another provision of the CARES Act is, they’ve increased the limits. So for a cash contribution, that wouldn’t apply to a donor-advised fund. Still, if you make cash contributions, you can deduct up to 100% of your adjusted gross income, so there are different planning opportunities.

Dean Barber: What’s the percentage if you do a donor-advised fund?

JoAnn Huber: It depends on what you’re donating.

Dean Barber: Say I’m donating stock.

JoAnn Huber: If it’s stock, it’s going to be 30% of your adjusted gross income.

Donor-Advised Fund Example

Dean Barber: Let me just give an example here, because I want to make sure that I get this, because if I can get it, hopefully, our listeners can get it, right?

Bud Kasper: That’s true.

Dean Barber: If I got $100,000 of income this year and I say, “I want to make a $50,000 donor-advised fund,” and then I go convert $50,000 from an IRA to a Roth. Suddenly, my taxable income would be $150,000, but 30% can be taken against the deduct or against the contribution to the donor-advised fund. So in that example, I can get my money from my IRA to my Roth IRA with no taxes due because I got to claim the full deduction for that $50,000 donor-advised fund.

JoAnn Huber: That’s the kind of thing that we have to look at is, what amount of income do you have to have? What amount do you need to give? Play with those numbers and see what gives you the best answer.

Dean Barber: Right, now I didn’t give the $50,000 away to charity this year. Remember what I did was, I put it into a donor-advised fund, and then I get to dole that out over ten years or however long I want to, to the charities of my choice. I can change my mind in the future. That’s tax planning, JoAnn, that’s what we’re talking about.

JoAnn Huber: Right, and that’s where we can make a difference. We can say, “What is it that you wanted to do?” Which is, you wanted to give to charity, and then how do we make it tax efficient?

Qualified Charitable Distributions

For those over age 70 1/2, we’ll look at qualified charitable distributions a lot of times. 

Dean Barber: Also affectionately known as the QCD. 

JoAnn Huber: There are all these acronyms.

Dean Barber: It’s so affectionate. 

Bud Kasper: Yeah, by the way, there’s a quarter on the floor next to you.

Dean Barber: This is another gift. This is another gift from Uncle Sam. Actually, this is a better gift than the $300 above the line deduction.

JoAnn Huber: Right. That one, it makes people feel good about themselves, right, but the QCD, I think, is right up there with the Roth conversions and different legislation that’s happened. It makes a big difference, especially with the higher standard deduction since few people are itemizing. The QCD benefit is people take money from their IRA and send it to charity. So like we use TD Ameritrade, and we’d contact TD Ameritrade, and they’d send the money directly to charity out of the IRA. 

Bud Kasper: Right. Got it.

The Benefit of QCDs

JoAnn Huber: The benefit of that is, you don’t have to include that in income, and so you don’t get to take the itemized deduction, the charitable deduction for it, but who cares?

Dean Barber: It’s better than that. 

JoAnn Huber: It is because it never hits your income. 

Dean Barber: Right. 

JoAnn Huber: And so…

Dean Barber: It can’t cause capital gains to be taxable. It can’t cause dividends to be taxable. It can’t cause more Social Security to become taxable. It’s better than the deduction.

JoAnn Huber: Right, it might help you with your Medicare premiums. 

Bud Kasper: And as Boomers continue to move past the age of 70, you’re going to have more of that opportunity in front of you.

Don’t Confuse Your RMD and QCD Age

Dean Barber: Now, don’t get confused because the RMD age is no longer the same as the QCD age. 

Bud Kasper: Right.

Dean Barber: They’re going to complicate this for you.

JoAnn Huber: Right. A common question this year is, well, can I still do a QCD since I don’t have an RMD? 

Dean Barber: Yes.

JoAnn Huber: You can. 

Bud Kasper: Yeah.

Dean Barber: But you have to be at least 70 1/2. You can’t do it at 70 years and five months and 29 days. You have to do it at 70 1/2. 

All right, here’s the thing, request a complimentary consultation by clicking here.

We can do that complimentary consultation in the office. We are doing that. Or we could do it through some kind of a virtual meeting, or we can do it via telephone. The important thing is that you start talking to us now about what you’ve got going on this year, but more importantly, what can we do for years to come to reduce the amount of money that you’re sending to Uncle Sam? It can be done, and the numbers are astounding. 

The “Original” CFP®

Dean Barber: I’m your host, Dean Barber, along with Bud Kasper and JoAnn Huber. Bud Kasper, the “original” CERTIFIED FINANCIAL PLANNER™.

Bud Kasper: The original?

Dean Barber: The original.

Bud Kasper: Yes. Well, and I knew Jesus when he first was born.

Dean Barber: Well, and Johnny Cash, as we now know.

Bud Kasper: What a dichotomy?!

Capital Gains and Phantom Income

All right. Capital gains. What do we have to do with capital gains before the end of the year?

Dean Barber: Well, here’s the thing. I call them, in years like this, phantom income. It’s income that can show up on your tax return, but there isn’t any gain to be seen.

JoAnn Huber: To clarify, we’re talking about capital gain distributions out of mutual funds.

Why “Phantom Income”?

Dean Barber: That’s right, mutual funds in volatile years. I think we agree we’ve had a volatile year. Most of the volatility occurred early in the year, back in March, but that volatility causes mutual fund managers to sell positions they may have held for years, which pushed the mutual fund share price. 

When they sell the underlying positions, that creates a capital gain on the stocks they held. Then at the end of the year, the mutual fund has to distribute that taxable gain. Now they don’t distribute it in the form of cash. It’s not the extra money made; it’s just distribution. Let’s say it’s a dollar per share distribution. Well, the share price drops by the same dollar the day they make the distribution. That’s why I call it a phantom gain.

So it’s possible if you bought some mutual funds at mid-year or even in the last two or three months, they might have some reasonably large capital gain distributions. You could have a capital gain distribution on that investment and not have a gain that looks anywhere near like the taxable consequences. Of course, we’re talking about taxable accounts only. 

Be Aware of Your Individual Accounts

So individual accounts, joint tenants with right of survivorship, joint tenants in common, trust accounts, etcetera. Those are the accounts you have to be cognizant of right now. Most mutual funds have already put out what their capital gain distribution estimates are. 

Some of them, the date you have to own the fund, the record date, to get the capital gain distribution, many have already passed. In many cases, there wasn’t a lot that to do this year, especially if you’d held it for a couple of years because you’re looking at pretty decent gains over two years with most equity mutual funds.

Bud Kasper: Absolutely.

Dean Barber: So, a 5%, 6%, 7% capital gain distribution is probably less than what you would realize if you sold that fund.

Bud Kasper: Right.

Tax Surprises You Need to Be Prepared For

Dean Barber: But, JoAnn, you’ve seen these things catch people by surprise, and they need to understand that they exist.

JoAnn Huber: I have.

Dean Barber: One of the downfalls of mutual funds in a taxable account, in my opinion.

JoAnn Huber: It upsets people when they are suddenly paying tax. And it’s like, “I didn’t make this much. Why am I paying taxes on this?” So it is that phantom income that causes a lot of grief.

Bud Kasper:That has to be noted. The advisor should make the recommendation and should know because they give you a pretty good idea as to what the distribution is going to be.

JoAnn Huber: Right, but you have to look at it. You never want to make an investment decision based on taxes. Taxes are one piece to consider, but you need to look and say, “Okay, does that holding fit into my overall investment portfolio?”

Bud Kasper: True.

It’s Not So Simple

JoAnn Huber: And do I want to keep it? Is there a purpose it’s serving, or do I want to sell it to avoid the capital gain distribution? And if you sell it, what’s going to be the tax impact of that?

Bud Kasper: Exactly.

JoAnn Huber: So it’s not just as simple as saying, “Oh, there’s this capital gain distribution. I need to get rid of it.”

Bud Kasper: And there’s that gray area in between. Yeah, I could do it. Yeah, I save a little bit in taxes, but is it worth losing the potential? Because if you sell it, then you can’t buy it back for 30 days. So we have that issue as well.

JoAnn Huber: Yeah. There are many things to consider, and you can’t look at any one of them alone. It needs to be looking at everything together.

Dean Barber: So let’s talk briefly. We did this in detail on The Guided Retirement Show™, our podcast. It was in season one. It was all about mutual funds versus ETFs. It’s episode 12 and 13 of The Guided Retirement Show™ in season one, and you can find it on your favorite podcast app or YouTube, or here

Mutual Funds, Not ETFs

I want to clear something up here because we’re talking about mutual funds and not exchange-traded funds. The exchange-traded funds typically don’t have the turnover of the stock because they’re trying more to track an index. So most of the ETFs are going to be more tax-efficient inside of a taxable account than a mutual fund would be. JoAnn, would you agree with that?

JoAnn Huber: I would agree entirely with that, and that’s why it’s so important to make sure you’re holding the right things in the correct type of accounts.

Dean Barber: Right.

JoAnn Huber: You know, where should you be holding your ETFs?

Bud Kasper: That’s excellent advice.

JoAnn Huber: Where should mutual funds, the bonds? And that’s an essential part of tax planning.

Dean Barber: We call that asset location.

Bud Kasper: Yeah. I’m afraid so many people out there are using a person to help them with their investment solutions. However, they’re not considering the importance of taxation on the net result of their investment.

Taxes Aren’t Many Advisors’ Expertise

Dean Barber: Well, let’s face it; there are many people in the investment world, Bud, that taxes are not their expertise. And unless you have a team of CPAs as we have with JoAnn and her team here, they don’t know. That’s not their expertise! They’re looking at the investment, and if they think that investment is the right investment, they’re saying, “Well, if you want to understand the tax consequences of it, go talk to your CPA.” 

Well, if the CPA doesn’t know what the investment advisor is doing, all kind of translation gets lost, and that’s where people wind up having bigger tax bills than what they should. And we see it happen all the time when people come in to visit with us for the first time.

Bud Kasper: Right. The critical element is not that you had a tax advantage necessarily at that moment in time. It’s the benefit that you get the next year, the following year, and so on. That’s how we compound that into an incredible planning opportunity.

JoAnn Huber: Yeah. That’s where I feel fortunate that we do work as a team. We can have that conversation with the advisor and say, “Do you realize what’s happening from a tax standpoint from this? And is there something else that we can do?” Then, they can share with us what’s going on. 

Communication is Critical

It’s essential to have that communication because otherwise, I think it goes back to that game of telephone. If you have that person being the intermediary, they often don’t know what’s said, or maybe it’s just one word that’s different, but that can be a significant difference. 

The impact of that one word can have a significant effect on your taxes. So everybody must be communicating and working as a team to help you keep your money. I mean, when we’re talking about tax planning, we’re looking at how do you maximize the amount of money you get to keep.

Dean Barber: So, JoAnn, you bring up an excellent point. So everybody listening, I want you to think about this for just a minute. When was the last time that you sat down and in the same room, you had your investment advisor, your CERTIFIED FINANCIAL PLANNER™, your CPA, your risk management person, and your estate planning attorney, all listening to what you want to have happen with your financial life? When was the last time that happened? For the majority of you, it’s never happened. 

The ultra-wealthy people in the United States, they expect that. The mass affluent, those of you out there, the millionaire next door, not only do you not expect it, you don’t even know it exists, but it does. And it’s right here at Modern Wealth Management

We’re Here to Help

Let us show you with a complimentary consultation, how we can, with our team of CPAs, financial planners, estate planning attorneys, risk management experts, bring clarity to your financial life in such a way that you feel confident and in control of everything. And in a big way, JoAnn, the tax part of that plan is the hub, right? Because everything comes off of that. Get that complimentary consultation by clicking here.

JoAnn Huber: Right. It goes back to what you said earlier in the show, every financial decision has a tax impact at some point.

Dean Barber: We appreciate you joining us here on America’s Wealth Management Show. We’re ready to say goodbye to 2020 too, but we still have a few weeks left. So hang in there. I’m Dean Barber, along with JoAnn Huber and Bud Kasper. We’ll be back with you next week. Same time, same place. 


Year-End Tax Planning Tip #1: Decide Whether to Take Your RMD in 2020

Dean Barber: One of the things we typically talk about is for those who have reached age 70 1/2, the required minimum distribution (RMD) age is different now. So talk a little bit about some of the changes that have taken place there.

JoAnn Huber: One of the provisions of the CARES Act waived the required minimum distribution for people for 2020. That’s great for many people because they don’t have to take that money out of their IRA or 401(k). It applies if it’s your IRA or if it’s a beneficiary IRA. So that was a significant change that happened this year. 

Now, another change happened that’s been forgotten about; under the SECURE Act, they said, “You know what, we’re changing the required minimum distribution age from age 70 1/2 to age 72.” 

“Let’s say we don’t have any tax due this year. Is that the right answer for us? Or do we want to take some income out, maximize that 12% bracket because we know we will be in the 22% or the 24% in the future?”

– JoAnn Huber

To Take the RMD or Not to Take the RMD

JoAnn Huber: That’s one change that happened, but then to go ahead and waive the RMD for everyone opened up many planning opportunities. You have to ask yourself, “Okay, I don’t have to take the RMD. But should I? Is there something else I should be doing?”

Dean Barber: Right, some people will be living on that requirement of distribution as part of what they plan on for their income, right? So for those people, there probably isn’t a dramatic change. 

Some people say, “Gosh, I wish I didn’t have to take this out because all it does is cause me to pay more taxes, and it causes more of my Social Security to become taxable. If I don’t have to take it out, should I take it out?”

Tax Brackets, Social Security, and Income

JoAnn Huber: And that’s the question that it’s going to vary on your situation. Dean, you said it right that if you have Social Security, if you have capital gains income, where are you taking your money? What income do you have? And what’s the impact if you take that out? 

Let’s say we don’t have any tax due this year. Is that the right answer for us? Or do we want to take some income out, maximize that 12% bracket because we know we will be in the 22% or the 24% in the future?

So we’re looking at the long-term implications and saying, “What do I need to be doing for 2020.”

Roth Conversion Opportunity

So, we’ve had conversations, and we’ve had a few people who don’t have to do it. So we say, “Let’s make a Roth conversion this year.” What that’s going to do is it’s going to reduce the RMD for next year because we did the Roth conversion. Now, we get to tax-free growth forever, and no RMDs on the Roth IRA unless it’s an inherited Roth IRA, which is a whole different topic altogether. 

You don’t have to take that requirement of distribution this year, but maybe you should. Or perhaps you should do a Roth conversion instead of the required minimum distribution. 

Year-End Tax Planning Tip #2: Qualified Charitable Distribution Opportunities

JoAnn, one of the other year-end things that we usually talk about is something called a QCD, or a qualified charitable distribution. People over the age of 70 1/2 with IRAs can send money directly to a charity, and then it doesn’t show up on your tax return.

JoAnn Huber: It’s a win-win. The charity gets the money, and you get it out without paying tax on it. And for most people, it’s going to be a tax benefit to do it that way. However, occasionally it’s neutral. 

A question I’ve gotten numerous times is, “If they change the required minimum distribution to age 72, can I still do a qualified charitable distribution?” And the answer is yes. They left it at 70 1/2. Even if you don’t take the RMD this year, you can still do the qualified charitable distribution.

Dean Barber: Right. Like you said, even if it’s a neutral event, at some point down the road, it’s probably going to wind up being a favorable event either for you later or for your beneficiaries in the future.

Earned Income & QCD Warning

JoAnn Huber: Right. I want to warn people because one of the other changes this year is that if you’re over age 70, you can now contribute to a traditional IRA if you have earned income. But if you do that, it will impact how QCDs are treated in the future. 

You really need to talk to somebody before you make that contribution. Do you want to put $7,000 into a traditional IRA, get that deduction, and then mess up something down the road? So make sure you’re talking to somebody and know the impact.

Dean Barber: It wouldn’t be something that would be messed up in the given year unless you were going to do a QCD the same year that you did the IRA contribution? 

The IRS Wants to Keep Things Complicated

JoAnn Huber: Well, actually, let’s say you contribute 2020, and it’s 2022 when you want to do the QCD. That doesn’t get treated as a QCD. You have to treat it as income if it went in after you were age 70 1/2. We want to keep things complicated is how the IRS looks at it. 

That’s why I said, “Is it worth the deduction this year?” Because you’re going to lose out on the ability to do the QCD, and that stays until you’ve taken out that money before you can do the QCD. So it’s a little confusing.

Dean Barber: Let’s say that you have five years worth of those $7,000 contributions, making it $35,000 of money that you put in pre-tax because you got to deduct it after age 70 1/2.

JoAnn Huber: Right. So the first $35,000 that goes out as QCD, you have to include in taxable income before you can exclude it from taxable income. So that’s just a little warning not to go there, maybe.

Dean Barber: It can create an accounting headache, which will probably be nothing but a headache. A headache and no tax benefit for the individual. 

JoAnn Huber: Right. 

RMD Age Increase?

Dean Barber: All right. So really quickly, before we leave RMDs. There are discussions taking place in Washington about moving required minimum distributions all the way to age 75. What do you think the chances are? 

JoAnn Huber: At this point, not very high. You know, we don’t know for sure what the election results are. But it looks like we’re going to have the Republicans retain control of the Senate and the Democrats retain control of the House. 

As long as that’s what happens, I think it’s going to be really hard for a lot to get done. I think we’re going to keep having just that back and forth and stalemates on different things. So I don’t see them changing it to age 75. Especially with the deficit, they want the money coming in as soon as they can get it. I think 72 is going to stick for a while.

Year-End Tax Planning Tip #3: Other Charitable Giving Tax Planning Strategies

Dean Barber:  Alright, let’s go back to the Tax Cuts & Jobs Act and how that relates to charitable giving. We talked about QCDs, that qualified children distribution, money coming directly out of the IRA. Many people who previously itemized their tax returns because of charitable contributions aren’t itemizing anymore because the standard deduction is so high.

Are there things that people should be doing or considering to give to charities and get a tax deduction? Even if they’re claiming that standard deduction?

JoAnn Huber: Well, the Tax Cuts and Jobs Act changed the standard deduction amount, and that has made a big difference in how much people benefit from the standard deduction. 

What we’re looking at a lot of times is, do we need to change how we’re giving? The QCDs are one method of looking at it. Another thing that we’re looking at often is if we want to give appreciated securities. And the benefit of that is you don’t have to include the capital gain in income, but you still get the full deduction. 

What About Bunching?

However, many people aren’t getting enough deductions because of that, so we say, “Okay, what else can we do?” One thing we can do is look at bunching. And what that means is, we might give two- or three-years’ worth of charity in one year. So we get a big deduction in one year. Then we take the standard deduction for a couple of years. We’re at least getting a tax benefit one year from the giving. 

Donor-Advised Funds

Then, we can look at donor-advised funds. The benefit of that is you put the money into a fund, you get the significant deduction on one year, but you can choose when you want to pay it out to the charity and what charity you want to go to. 

It puts you in control of giving because many people will say, “I want the charitable deduction, but I don’t want to give the charity this huge amount upfront, because what if something changes? And what if they’re not using it for charitable purposes?” And they want the control. A donor-advised fund puts you in that driver’s seat to say, “Okay, let’s take the deduction now, and then decide how to distribute it in the future. “

Dean Barber: Yeah, I haven’t seen donor-advised funds more popular than they have been since the Tax Cuts and Jobs Act. That’s a huge thing.

CARES Act Charitable Planning Opportunity

JoAnn Huber: Yeah! And I think one thing to point out this year, under the CARES Act, is they said, “Charities are suffering, they’re not getting as much money, and they have this huge demand.” So typically, for most charitable deductions, you’re limited to 60% of your adjusted gross income to be able to deduct it. This year they said, “We’re going to allow you to deduct up to 100% of your adjusted gross income.”

That presents an excellent planning opportunity because maybe somebody has been considering giving a large charitable donation. So they can do that this year, and then ask themselves, “Do we want to do a Roth conversion or something to offset that?” We can even generate some additional adjusted gross income to take the deduction in the current year needed.

Dean Barber: It’s always interesting to look at charitable giving and how it affects your taxes. And I think even more so with the higher standard deduction.

Estate Tax Exemption

JoAnn Huber: Well, I think something else people forget about is with the estate tax exemption amount being about $11.6 million currently. There are very few people who will get a tax benefit from giving to charity at death. 

So many times, we’re having conversations with people and say, “Do you want to wait till death? Or do you want to give now where you can get a tax benefit from it, and be able to do other things with your income to get future benefits?”

It’s about weighing that do we want to wait till death or give during life?

Year-End Tax Planning Tip #4: Capital Gains Distributions

Capital Gains Tax Increase?

Dean Barber: Okay, so before we’re talking about capital gains, we know that the Biden administration, assuming that that holds, is talking about increasing the taxes on capital gains. 

So this is a big year, in my opinion, of knowing what our capital gains rates are, and they’re favorable. But if they go to ordinary income, which is what it sounds like the administration wants to do. That could be a game-changer for people with their investments, whether it’s stocks, bonds, real estate, land, or those types of things. What are your thoughts on capital gains this year?

JoAnn Huber:  You know, I’m kind of at a loss of what to think on it, because as long as we keep the divided House and Senate were okay. I don’t believe we’ll be able to get the capital gains rate through. But how long is that going to last? 

We see so often in tax law they discuss something, and it might take a few years, but eventually, it comes through. Will they be able to take control of Congress in the next election? I don’t think there’s a significant risk of capital gains rates going up.

Dean Barber: That’s good to hear.

JoAnn Huber: That’s my opinion. They’re talking about that ordinary income tax rate kicking in at like $1 million. 

Dean Barber: Oh, okay. 

JoAnn Huber: Well, is that $1 million of gross income, taxable income, adjusted gross income? Will it be all of the capital gains subject to tax as ordinary income?

Dean Barber:  It’s just a number Congressperson has put out there now.

JoAnn Huber: Or is it going to be just the gains over the $1 million? I think there’s so much unknown about it! 

Capital Gains in 2020

You have a capital gain you’re looking at, and there are things that you need to be considering. I would be running projections and saying, “Okay, what happens if we sell it this year? What if we wait till next year? And what if those tax rates do go into play?” 

That’s the thing about planning. You need to say, “Is it a risk I’m willing to take to wait? Or do I need to go ahead and sell it now?”

Capital Gains You Can’t Control

Dean Barber: Let’s go away from capital gains that you can control to capital gains that you can’t control. 

JoAnn Huber: Capital gains distributions? 

Dean Barber: Yeah, the capital gain distributions out of mutual funds. It’s no secret. We’ve had an extremely volatile market this year. Now, in the last few months, people are going, “The market is great!”

But whenever you start having large gyrations in the market and big sell-offs, many mutual fund managers will sell off securities to help protect some of the gains in those funds. And they may have purchased those security several years ago, creating an artificial gain inside the fund that becomes a taxable event at the end of the year.

JoAnn Huber:  They’re required to distribute it.

Dean Barber: So those mutual funds are now starting to put out what their estimated capital gain distributions will be. Some of them take place in November. Some will take place in December.

This is one of those years where I think people must look at mutual funds that they hold in taxable accounts and understand the estimated distributions. You can then look at the rest of the accounts you have and see if you can offset that. Is there a way that you can avoid some of that without messing up the investment strategy? 

Look at Your Capital Gains Distributions

JoAnn Huber:  I think it’s essential to look at the capital gain distributions and say, “Does it make sense to sell that position?” Because you know, it’s going to have a large capital gain distribution? And are you going to pay less taxpaying gain on whatever the gain is on that position right now? 

But you also have to look at how does it fit into your investment portfolio? Is it fulfilling some need that you could satisfy some other way? And then you also need to look and say, “Did I have realized capital gains or losses earlier in the year?”

Maybe you had a large capital loss that you’ve realized, let’s say in March, you went through and reallocated your portfolio when everything was going down and recognize a lot of loss? Are you going to have that loss that will offset the gain? And do you care? Or do you want to keep that loss, so you can offset gains in the future if the rates go up?

Understand 2020 Could See Large Capital Gain Distributions out of Mutual Funds

Dean Barber: The important thing is to understand that this could be one of those years with large capital gain distributions out of mutual funds. It’s crazy not to take the few minutes to sit down and look at what those are, and then look at it in the context of your overall plan.

JoAnn Huber: That’s the key – looking at it in your overall plan. We’re talking about the financial plan and the tax plan. You have to look at that together to see what you need to do. Sometimes people are so afraid of paying the tax on it that they might put themselves in a poor investment situation. So, we want to make sure that we’re looking at it holistically and making the best decision. 

Year-End Tax Planning Tip #5: Roth Conversions

Dean Barber: Alright, let’s, uh, let’s skip to Roth conversions. Roth conversions are something that we typically look at at the end of each year. We look at if it makes sense to convert some of that money in traditional IRAs, traditional 401(k)s over to Roth IRAs. 

Typically, what we’re looking at is somebody that’s already retired, controlling income from another source, keeping their tax bracket low, being able to convert at a lower rate than the requirement of distribution would be in the future. 

But this year, I think we have something added to that with COVID, loss of jobs, etcetera. Maybe you’re in a unique year this year, perhaps it’s unfortunate, but maybe your income is lower than it would typically be. And maybe you’re planning on going back to work, or maybe you’re already back to work because of what’s happened. You could do a Roth conversion this year, even if you’re not retired yet, even if you’re 35 or 40 years old, you should be thinking about moving some of that money from a traditional IRA or traditional 401(k) over to a Roth IRA or Roth 401(k).

Everyone Should Look at Roth Conversions this Year

JoAnn Huber: Yeah, I agree. This year is ideal for doing that. And as you pointed out, it isn’t just retirees that should be looking at it. I think everyone must be looking at saying, “Do I have room in my current tax bracket? Or am I in a lower tax bracket this year than what I will be?” Does it make sense? Maybe you’re in that 12%? Do we want to go up to the 22% bracket and convert? What we want when we do the Roth conversion is that the longer we can leave it in the Roth and allow it to grow tax-free, the more beneficial it will be. But we have to be careful that we’re not doing so much that we’re creating an adverse tax hit that doesn’t make sense.

Dean Barber: I think Roth conversions are something that should be looked at every single year by everybody that has traditional IRAs. The reason I say that goes back to what we talked about at the very beginning of this video. As long as you live in the United States, as long as you have money or make money, taxes will be a fact of life. 

Tax Planning for the Future

Dean Barber: So I think it’s critical that your year-end tax planning isn’t just focused on that year or next year. It needs to be a multi-year. You need to be looking at 5, 10, and 15 years ahead. Understanding that, yes, the codes are going to change. But if you can’t look at your year-end tax planning in the context of your longer-term tax plan, you’re just putting band-aids on something that could ultimately be something far worse.

JoAnn Huber: You have no idea if you’re even doing what’s right. If you’re not having that forward-looking 10 or 15 years, you don’t know what you should be doing today. And what you’re doing might be the right thing, and it might be the wrong thing. But how do you know if you don’t have a forward-looking plan?

We’re Here to Help You with Year-End Tax Planning

Dean Barber: That’s all I’m saying! Make sure that you put your tax planning strategies in the context of your long-term plan. As always, we’re here to talk to you. If you’re not a Modern Wealth Management client and want to have a complimentary consultation, click here. We’re happy to sit down and visit with you. It can do that through a zoom meeting, we can do it face to face, or we can do a quick telephone call. 

As always, to all of our clients, thank you for your trust and your confidence. Happy Holidays. We’ll be talking to you soon.

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