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    Advanced Year-End Planning Strategies

    Advanced Year-End Planning Strategies

    2020: A Year Like No Other

    Who would have foreseen the year we’ve experienced? Global pandemic. Working from home. Masks and social distancing. Economic shutdowns. Social unrest. Devastating fires. And that’s not even considering the upcoming election.

    With all this uncertainty, can we really offer suggestions for end-of-the-year planning?

    The answer is a resounding yes. In fact, planning for 2021 is probably more important than ever, even if it is less certain. We’ll provide you with a clearer outlook of what we expect in 2021, once the election is over. In the meantime, here are a number of strategies to consider.

    Income Tax Planning 

    Regardless of who wins the election, the federal government is going to have to figure out how to pay for the unprecedented support of the economy in 2020. Tax rates, which were reduced by the Tax Cuts and Jobs Act of 2017, are scheduled to return to their previous levels in 2025. We wouldn’t be surprised to see this return take place considerably sooner. In addition, Congress is discussing proposals that could limit tax deductions for higher income taxpayers to 28%. Put it all together and we believe that some higher income households might want to think about strategies that would enable them to pull back income and deductions into this year, instead of deferring them to 2021. Here are several ideas that may warrant discussion with your financial advisor and accountant:

    • Converting Your Traditional IRA to a Roth IRA: You’ll pay taxes on the amount converted, but you’ll be able to withdraw assets at retirement with no tax liability. If you expect your income to be higher next year, this year might be the time to pay tax on a Roth conversion.
    • Bunching Deductions: We often look at bunching two or more years of deductions (such as charitable gifts) in one year to make it easier to exceed the higher standard deduction created under the Tax Cuts and Jobs Act.
    • Distributions from Retirement Accounts: If you plan on taking distributions from tax-deferred retirement accounts to fund regular cash needs early in 2021, think about making those withdrawals this year and possibly paying lower taxes on them

    Changes To Be Aware of This Year

    • Required Minimum Distributions: This is the time of year when we usually urge clients who are age 72 and over to take their Required Minimum Distributions (RMDs) before December 31. This year is different. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, RMDs were suspended for 2020. Decisions to take distributions from a qualified retirement plan before the end of 2020 should be based on cash needs and tax considerations.
    • Qualified Charitable Distributions: Although RMD’s have been waived for 2020, charitable rollovers are still available to those over age 70½. IRA owners over the age of 70½ may give $100,000 per year in Qualified Charitable Distribution gifts directly to a public charity (not a Donor Advised Fund). This distribution from the IRA is not included in your Adjusted Gross Income (AGI), and therefore will not count as income when calculating Medicare premiums.
    • Charitable Deductions for Cash Donations: Tax treatment of cash charitable gifts was also made more generous under the CARES Act. Usually, you must itemize your deductions to claim a charitable gift against your income. For 2020, taxpayers may deduct up to $300 in cash donations on top of the standard deduction without itemizing. For those who do itemize, the limit for cash donations has been increased to 100% of AGI from 60%, if made to qualified public charities. This increased limit does not apply to gifts made to Donor Advised Funds or supporting organizations.
    • Medical Deductions: The SECURE Act passed at the end of 2019 returned the threshold for medical expense deductions to 7.5% of AGI. Consider paying outstanding medical bills before the year ends.

    Common Sense Tax Strategies for This or Any Year

    Tax Withholding: Be sure you understand which tax bracket you’re in for both income and capital gains. Your accountant can help you to adjust your paycheck withholdings.

    Retirement Plan Contributions: If you participate in a 401(k), make sure you maximize your 2020 contribution before the end of the year ($19,500 regular contribution + $6,500 catch-up contribution for those age 50 or older). While some IRA structures, such as a SEP IRA, provide additional time to make 2020 contributions beyond December 31, now is an excellent time to ask your accountant what your 2020 contribution can be. For those who have started new businesses and may not have set up a retirement plan, we recommend you consult with your Lenox team to determine if a retirement plan makes sense and if so, what type.

    Tax Loss Harvesting: This year has seen a tremendous amount of buying and selling in individual portfolios. By now, your accountant should have a good idea of gains and losses you have realized in your portfolio this year. If you are in a net realized gain position, you may be able to sell some securities with unrealized losses to further reduce your capital gains tax for the year. If you are in a loss position, you can take the opportunity to rebalance your portfolio and sell some winners without incurring taxes for this year. Be careful to avoid a “wash sale” — buying the same security 30 days before or after selling it at a loss.

    Donor Advised Fund Contributions: Gifts of appreciated securities held longer than one year are deductible at their fair market value up to 30% of your AGI. We recommend making such gifts well in advance of December 31 to ensure they are counted for this year. 

    Estate Planning

    The federal lifetime estate and gift tax exemption is $11,580,000 (to be adjusted for inflation a few weeks before the election). The Tax Cuts and Jobs Act that raised the exemption from $5 million to its current level, however, is scheduled to expire in 2025. In other words, you could be subject to federal estate tax if your estate is greater than $5 million, not the current $11.58 million. What’s more, this number may be decreased further and earlier than 2025, depending on who wins the presidential, senate and congressional elections.

    We suggest that high-net-worth families make lifetime gifts while the current exemption is in force — preferably before the end of this year. Here are some strategies to think about:

    Gifts to Trusts: Use lifetime gifting to trusts established for the benefit of the next and future generations. Some trusts can be structured so that a living spouse of the grantor may have access to assets in the trust in the event they are needed.

    Grantor Retained Annuity Trust (GRAT): Contribute assets to a trust that pays its grantor an annuity for a set period of time. The initial amount contributed to the trust, plus interest, is returned to the grantor, leaving the remaining appreciation outside of his or her estate. This is a great strategy for assets expected to appreciate rapidly in the near future. Structured properly, these trusts do not use any of the lifetime gifting exemption described earlier.

    Charitable Lead Annuity Trust (CLAT): Contribute assets to a trust that pays to charity for a number of years and remainder is left for heirs. Grantor gets an immediate charitable tax deduction and makes a smaller gift for estate tax purposes to heirs.

    Qualified Personal Residence Trust (QPRT): Gift a residence to a trust while retaining the right to use the property for a set term of time. At the end of the term years, the value of the gift will be less than the current value of the property and use less of the lifetime exclusion.

    Outright Gifts: Remember, each person can gift up to $15,000 per year to as many individuals as he or she wants without any gift or estate tax consequences. It may make sense to gift a highly appreciated asset to an individual who can sell it in a lower capital gains tax bracket. Outright gifts do not come with the restrictions (good and bad) that come with more complex strategies.

    A Final Word

    All these ideas only make sense, if you have enough assets to live as you wish after you implement them. Remember — the purpose of a financial plan is to strike the right balance among all of your goals, not just minimize taxes. As always, your Lenox team is available to help you make more informed decisions and progress with greater confidence toward your own unique vision of financial security.


    Fee based planning services are offered through Lenox Wealth Advisors, LLC (LWA), a registered investment adviser. Services will be referred by qualified representatives of MML Investors Services, LLC (MMLIS) LWA is a subsidiary of NFP Corp. (NFP) and affiliated under common control with Lenox Advisors. Lenox Advisors and LWA are not subsidiaries or affiliates of MMLIS, or its affiliated companies. The information provided is not written or intended as specific tax or legal advice. Lenox Advisors, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. The views and opinions expressed are those of the author and may not accurately reflect those of the individual, or company, providing you the content. Past performance is no guarantee of future performance or market conditions. Lenox Advisors, Inc. (Lenox) is a wholly owned subsidiary of NFP Corp. (NFP), a financial services holding company, New York, NY. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 90 Park Ave, 17th Floor, New York, NY 10016, 212.536.8700. CRN202210-272762