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Educational Resources

By Jeffrey R. Wolfe, Senior Vice President and Manager, Wealth Planning Strategies

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Well, the extended tax season finally ended this week, and while the tax rules generally stayed the same for the 2020 tax year, it appears change may be on the horizon. So, don’t get too comfortable with the end of tax season because it’s time to look forward to the rest of this tax year. Whether changes come or not, now is a great time to review your strategies to make sure your tax situation is in its best shape. Following are some planning ideas worth considering:

  • Was your tax bill too high, or was your refund too large? Make sure to Review your paycheck withholdings to make sure that you continue to withhold the appropriate amount with the current tax regime. Remember, a large refund is just an interest free loan to the government!
    • With continuing market volatility and business disruptions, coupled with the hope of “reopening” soon, review with your tax professional if there are any other modifications to your tax planning you may need to consider in these unique times such as:
      • Taking certain gains or losses in this taxable year. Choosing the appropriate time to take such actions can help control your potential tax liabilities.
      • Fully funding employer-sponsored plans and/or tax-deductible IRAs. Maximizing these contributions may lower your tax bracket.
      • Reviewing Roth retirement planning options, especially in this volatile market. Converting existing pre-tax assets to a Roth IRA, funding a Roth IRA, or making Roth salary deferral contributions through your 401(k), 403(b), or 457(b) plan now may provide more after-tax cash flow during retirement. Recall, though, once you make a Roth conversion, it cannot be undone.
      • Choosing tax-exempt investments and accounts like tax-exempt municipal bonds or life insurance.

While these planning ideas tend to be evergreen, you cannot look at them in a vacuum. There have been many recent proposals to change the existing income tax laws. For example, President Biden has proposed increasing taxes on all individuals with more than $400,000 of income and increasing the highest tax bracket from 37% to 39.6%. Also proposed for individuals with more than $1 million of income is the elimination of preferred capital gains rates, meaning capital gains could be as high as 43.4% for federal taxes (39.6% tax rate plus 3.8% net investment income tax).

It’s important to note that these increases are only proposals; there’s not a single bill being debated by Congress about income tax increases at the time of this writing. However, it’s clear that President Biden is looking for ways to pay for some of his spending goals, and increased taxes is on his agenda. Consequently, as you review your tax planning options, you need to take these possibilities into consideration and decide whether this may accelerate or delay some tax planning techniques.

As they often say, the only thing constant in life is change.  While delay or angst may be a natural reaction to these issues, balanced and pragmatic planning works much better. Stay diligent and review your situation with your tax advisor and your financial advisor to put together a plan that is right for you.

Benjamin F. Edwards does not provide tax advice; therefore, it is also important to consult with your tax professional for additional guidance tailored to your specific situation.

May 18, 2021 |