While many individuals are struggling financially during the COVID-19 pandemic, there are tax planning strategies that can be implemented now for long term income tax savings.
- Convert IRA to ROTH IRA – If the value of your IRA has taken a dive during this volatile market, it may be time to roll your IRA, or a portion of it, into a ROTH IRA. The conversion of your IRA to a ROTH IRA will trigger taxable income, however the taxable amount may be lower due to a decreased portfolio value. You may also be in a lower income tax bracket in 2020 if you had a reduction of income from previous years. Once in a ROTH IRA, your investments will grow tax free and withdrawals made when you are of retirement age will also be tax free (unlike an IRA where distributions are subject to income tax). Just be sure that you have enough cash outside of the retirement account to pay the income tax liability on the conversion from an IRA to a ROTH IRA, as you cannot withhold funds from the rollover.
- Early IRA Distribution – Individuals needing cash now, may withdraw up to $100,000 per person penalty free under the CARES Act if they have tested positive for COVID-19 or suffered adverse financial consequences as a result of COVID-19. Taxpayers will still owe income taxes on the amount withdrawn, but the federal 10% early withdrawal penalty will not apply and most states have conformed to the penalty waiver.
- Front Load Retirement Plan Contributions – Consider frontloading your 2020 retirement plan contributions early in the year to take advantage of savvy stock opportunities if the market is low.
- Forego IRA Required Minimum Distributions (RMD) – For retired individuals that do not currently need cash flow, RMD are not required for 2020.
- Tax Loss Harvesting – Speak with your investment advisor about tax loss harvesting from your capital assets. Now may be the time to sell investments at a loss to offset capital gains in the future. Just be aware of the wash-loss rules that disallow losses on “substantially identical” stock or securities sold for a loss and repurchased within 30 days.
- Donating Stock to Charity – Consider donating stock to charitable organizations. If you do not itemize your deductions for 2020, you can still receive an above the line deduction for charitable contributions (including stock) for up to $300. Your charitable donation of appreciated stock held over 1 year is valued at its Fair Market Value (or current selling price) up to 30% of your AGI and you do not have to pay tax on the capital gains as if you had sold it. Stock held less than 1 year is deductible at your cost basis in the shares. If you have shares that have declined in value you can take a deduction of the FMV, not your cost basis, but this may be a better alternative if you would otherwise be limited to the maximum $3,000 annual capital loss limitation.
Speak with your tax advisor and financial planner to see if any of these tax planning strategies may be of benefit to you.
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Dana R. Borys, An Accountancy Corporation is a boutique tax consulting and compliance firm working with start-up/emerging growth companies and the related individual owners and officers. Building connections beyond the code.