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James Royal: 5 unusual year-end tax strategies for investors




Taxpayers have a number of deductions and credits they can take to reduce their tax burden, but those looking to get a break from investing activities have a more limited menu of choices. If you are an investor, you will want to optimize your tax position with strategies that go beyond traditional ones, earned income credits, interest write-offs, and more. And the deadlines for taking those steps are essential to remember if you want to lock in your tax break for this year.

Here are five unusual year-end tax strategies for investors to reduce what they owe.

Strategies to reduce your taxes

Both the traditional 401 (k) and the traditional IRA are both well-known ways to save for retirement and lower your taxes (although the traditional IRA has some limitations.) They are certainly great measures for investors if they haven’t already. does so, and those looking for the best and easiest ways to lower their tax bill will get the most out of these strategies.

But if you’ve taken full advantage of those avenues, here are more unusual ways to beat the IRS, including a new one in 2020.

Discover a fund advised by donors. A donor-advised fund is a great way to get around the standard, relatively high tax deduction, which can limit your ability to get additional write-offs for your charitable contributions.

By making a charitable contribution to a donor advised fund (before the end of the year), you can deduct that amount from your taxes this year. During this time, you can distribute the funds in subsequent years, and the money can even grow tax-free in the fund, providing more benefits to the charity.

“From the perspective of the organizations you support, nothing changes, but the donor advised fund allows you to control when and how much your charitable tax deduction is,” said Mark Brown, CFP and Managing Partner at Brown and Co. in Denver. area.

The donor-advised fund has many advantages, including flexibility and simplicity.

Donate directly from your IRA. A donor advised fund is optimal if you are able to exceed the standard deduction, but if you are unable to meet that threshold and still want to donate, you can donate directly from your IRA. .

“For those who are at the minimum age for distribution and who may not be itemizing taxes, qualifying charitable contributions are a great way to give directly to your IRA’s charity,” said Michael Kojonen , founder and owner of Principal Preservation Services in Sainte-Croix County, Wisconsin.

Normally, investors with a traditional IRA and subject to a minimum required distribution, or RMD, could use the qualifying charitable contribution rule to exempt their distributions from tax.

Although the RMD was suspended this year under the CARES Act, investors can still donate money and claim the deduction, Kojonen says.

You will need to take care of your charitable donations by the end of the calendar year.

Convert your traditional IRA to a Roth IRA. And if you are able to get out of a required minimum distribution from your traditional IRA, it might be a good time to convert that fund into a Roth IRA. You can save on taxes that you would otherwise have paid if you had converted in a normal year. The calendar year in which you convert will determine when you are taxed.

“Some retirees may have an unusually low tax rate this year because their RMD are subject to regular income tax rates and can often be a significant source of taxation in retirement,” Brown said. He suggested that if you are in a lower bracket, it may be a good idea to convert part of your traditional IRA to a Roth, which reduces the tax liability that usually accompanies the conversion.

The Roth IRA remains one of the most popular retirement plans because of its tax-free benefits.

Look in trusts. Trusts can be an effective way to achieve all kinds of goals when planning your estate. Given a relatively favorable tax regime and the potential that the Biden administration could make it less favorable, it might be wise to create a trust to avoid future tax increases.

With the lifetime donation exemption amount at an all-time high of $ 11.58 million per person (as of 2020), Brown suspects the amount will decrease in the future.

“It makes sense to consider strategies like grantor-kept annuity trusts and intentionally flawed grantor trusts,” Brown said. “The intention is to achieve future capital appreciation in your estate and to avoid property taxes.”

“The current low interest rate environment can make these wealth transfer strategies even more attractive,” said Brown.

Older workers can still contribute to an IRA. While contributing to an IRA is a typical game plan to lower your taxes and you have until April 15 of the following calendar year to do so this year has seen something new for older workers. The SECURE law removed the maximum age for contributing to a traditional IRA.

“It allows people over 70 who are still earning income to contribute to a traditional IRA,” said Morgan Hill, CEO and owner of Hill & Hill Financial in Woodstock, Georgia. “This has never happened before and for many it could be a good tax strategy to take advantage of.”

You can also contribute to a Roth IRA, but this will not reduce your taxable income. No matter what type of IRA you contribute to, you have until tax day to deposit your money.

At the end of the line

When preparing your taxes, it is important to start before the end of the calendar year, as some tax movements need to be made before the new year. During this time, others can wait until tax day. Knowing which moves can be made when and then acting quickly to get them done on time is essential.

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