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Financial Planning Opportunities for the New Year Thumbnail

Financial Planning Opportunities for the New Year

By: Peter Ashby

2020 was a year like no other.  We had the shortest recession in history, a falling then rapidly rising securities market, a pandemic, lockdowns, new legislation(x2), an election (still ongoing), and finally more stimulus in 8 months than we received in the 8 years after the Great Financial Crisis.  I think most of you will agree with me, when I say, “good riddance to 2020”.  Now that we can put the bookend on last year, it’s time to look forward to how we can improve our lives and planning opportunities in 2021.  We’ll start by going over what was passed in the recent stimulus bill and how it will affect you, our clients.

Stimulus Checks: We are all getting $600! (well, some of us anyway).  Similar to the CARES Act, Congress has authorized another round of stimulus checks that provides a “base” amount of $600 to each individual that gets phased out as you climb the income scale.  The phaseouts are as follows:

  • Single Filer: $75,000
  • Joint Filer: $150,000
  • Head of Household Filer: $112,500

Once you breach this threshold, your check will be reduced by $5 for every $100 of AGI you have over these limits.  Like the CARES Act, the Treasury Department will use your 2019 Adjusted Gross Income to determine eligibility for the $600.  Unlike the CARES Act, if you made more money in 2020, there is no claw back provision in this bill meaning that you get to keep the money!  Additionally, if your income was above the threshold in 2019 but fell below in 2020, you will be able to have the credit apply on your 2020 tax return.  Given that RMDs were suspended for 2020, some of you who would’ve been phased out and could afford to leave the money in your IRAs, may qualify for the stimulus check this year.  While this is great information to know, you may be thinking, “how does this help me in 2021”. The short answer is it might not, but if you are in the camp that believes another round of stimulus is coming in 2021, then you should consider using a few planning opportunities if you are close or slightly over these thresholds.  

  • If you are still working, you can reduce your AGI by contributing more or maxing out your retirement accounts.  
  • If you are on a high deductible medical plan, you can maximize contributions to an HSA account if you haven’t enrolled in Medicare.
  • If you are retired and not yet 72, you may want to consider delaying your IRA withdrawals if you can afford to or have an account that may not add to your AGI (Roth IRA, Trust, Individual Account).  

Charitable Giving: The CARES Act included a new tax benefit for individuals making charitable contributions in 2020.  It gave an above-the-line deduction for cash contributions for individuals who do not itemize deductions on their Federal tax returns capped at $300 for both individuals and joint filers.  The recent legislation not only extends this benefit into 2021 but also removes the marriage penalty associated with the earlier version and allows joint filers to claim a deduction up to $600.  This will benefit those of you who aren’t able to use Qualified Charitable Distributions (QCDs) yet because you are under the age of 70 ½ and will also benefit those of you who want to give small amounts to a few charities but don’t want to go through the hassle of doing a QCD.  

Another provision in the recent bill extended the ability for an individual to deduct up to 100% of their AGI when making an all-cash contribution to a qualified charity.   This does not include donor-advised funds.  While this may sound great, it may not make sense to fully reduce your AGI to $0 as you may want to recognize some income in the lower tax brackets and save the deduction for future years when you would like to offset income in the higher bracket ranges.  You should consult your CPA when doing this type of tax planning.

Lastly, if you are retiring this year and under the age of 72, you should evaluate whether a Roth conversion strategy is a good fit for you.  With the deficit set to expand by another few trillion dollars, at some point we believe the bill will become due, most likely in the form of higher tax rates.  Being able to convert part of your 401(k) or IRA to a Roth could give you more flexibility down the road, regardless of which administration is currently in office.

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