Question

1. Identify 10 wealth planning strategies for tax purposes (tax reduction strategies).

Answer 1

1. Consider Roth IRA conversions - A thoughtful strategy utilizing Roth conversions can be an effective way to hedge against the threat of facing higher taxes in the future.

2. Explore alternative ways to contribute to Roth accounts - Taxpayers at higher income levels are prohibited from contributing directly to Roth IRAs. For 2020, income phase-outs begin at $124,000 ($196,000 for married couples filing a joint return). Taxpayers may want to consider funding a non-deductible (i.e., after-tax) IRA and then subsequently converting to a Roth IRA. There are no income restrictions on Roth IRA conversions. However, adverse tax consequences, referred to as the “pro rata” rule, may apply if the individual owns other pretax IRAs (including SEP-IRA or SIMPLE-IRA).

3. Maximise deductions in years when itemizing - With the large increase in the standard deduction under recent tax law changes, and the scaleback of many popular deductions, fewer taxpayers will choose to itemize on their tax return going forward. Some taxpayers may benefit by alternating between claiming the standard deduction some years and itemizing deductions other years.

4. Be mindful of irrevocable trusts and taxes -
Because of the low income threshold ($12,950 for 2020), which will subject income retained within an irrevocable trust to the highest marginal tax rates
and the 3.8% Medicare surtax, trustees may want
to reconsider investment choices inside of the trust (municipal bonds, life insurance, etc.). Or, maybe trustees should consider (if possible) distributing more income out of the trust to beneficiaries who may be in lower income tax brackets.

5. Review estate planning documents and strategies - The increase in the lifetime exclusion amount for gifts and estates ($11.58 million per individual in 2020) may have unintended consequences for some individuals and families with wealth under that threshold. They may think that they do not have to plan for their estate.

6. Plan for potential state estate taxes - While much attention is focused on the federal estate tax, certain residents need to know that many states have estate or inheritance taxes. There are a number of states that are “decoupled” from the federal estate tax system. This means the state applies different tax rates or exemption amounts.

7. Develop a strategy for low cost-basis assets - Ensure stepped-up cost basis is maintained when property is transferred at death. For example, careful consideration should be made around lifetime gifts that may jeopardize a step-up in cost basis on property at death. When property is gifted, the party receiving the gift generally assumes the original cost basis. Additionally, certain trust provisions may be utilized to ensure that property receives a step-up in cost basis
at death.

8. Expand use of 529 accounts for education savings - 529 college savings plans retain existing tax advantages. Account earnings are free of federal income tax, and a special gift tax exclusion allows you to elect to treat up to $75,000 of contributions as though those contributions had been made ratably over a five-year period. Qualified education expenses were expanded in recent years to include laptops, computers and related technology. The new tax law allows families to use up to $10,000 annually for K–12 tuition. Make sure to consult with a tax professional if considering a distribution for K-12 expenses since there may be adverse state income tax consequences.

9. Consider the charitable rollover option if you are a retiree - Retired IRA owners (age 701⁄2 and older) may benefit from directing charitable gifts tax free from their IRA. Since even more retirees will claim the higher standard deduction, they will not benefit tax-wise from making those charitable gifts unless they itemize deductions. Account owners are limited to donating $100,000 annually, which can include the required minimum distribution (RMD), and the proceeds must be sent directly to a qualified charity.

10. Maximise the 20%deduction for Qualified Business Income (QBI) -TheTaxCutsandJobsAct(TCJA)introducedanew provision (Section 199A) that allows certain taxpayers to generally deduct 20% of qualified business income on their tax return. Business income from pass-through entities such as sole proprietorships, partnerships, LLCs, and S Corps may qualify for this new deduction. Certain types of businesses — defined as a specified service trade or business (SSTB) — may be limited from taking the deduction based on the taxpayer’s household taxable income.

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