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Last Call for
End of the Year Tax Moves

The end of the year is a good time to check on your financial accounts. The last day of December is sometimes a significant deadline so it can make sense to do some year-end housekeeping, including evaluating tax strategies and making plans for the coming year. 

Jeff Powell, CIO, Managing Partner & Founder of Polaris Wealth & Jeremy Witbeck, Partner at Polaris Wealth, address key year-end tax moves you want to make in the last few weeks of 2020 in order to help reduce next year’s tax obligations.

Jeff Powell

Jeff Powell

Jeremy Witbeck

Jeremy Witbeck

Jeremy Witbeck {0:04}
Welcome to our players podcast. So I am your host, Jeremy Witbeck, and a partner of Polaris Wealth Advisory Group. And we have with us Jeff Powell. Jeff is our chief investment officer and managing partner, Jeff, great to have you. 

Jeff Powell {0:18}
Good to be here Jeremy.

Jeremy Witbeck {0:19}
Jeff, I am really excited to go over our topic today. This is one that we get to really look at and talk about each and every year. And that is your tax planning. It’s hard to believe that we’re already in the month of December getting close to the end of the year. But I’m eager to hear your thoughts and insights as to how we can best prepare for the upcoming 2021.

Jeff Powell {0:43}
Yeah, not only are we in the summer, but we’re halfway through December. So if you’re going to act upon some of these things, you really only have a couple of weeks to make sure that you kind of wrap things up. You know, the first thing that comes to mind when you’re asking about tax planning for your round, would be to sit there and do as much tax loss harvesting as you possibly can, at the end of the year. I hate taking taxes and portfolios at the end of the year, we only do it if we really see that there is risk to the portfolio, something of that nature, we really want to make sure that we’re not a causing taxes, because I mean, if you’re gonna take a hit right now you’re paying for it in four months. So why not sit there and do the opposite, why not sit there and go through what’s been happening during the course of the year, look at your realized and unrealized gains or losses, make sure you’re matching your short term and long term gains properly, and offset it as much as possible. You know, bottom line behind it is, if you can do as much as you can, a tax dollar today is better than paying it, you know, it’s better to put that off as long as you possibly can or to lessen it. And today’s dollars were the today’s dollars are more expensive than tomorrow’s dollars. So the first thing I would throw out? Or do do an asset allocation check, do a a overall tax harvesting, check and try to offset as much of that as you possibly could.

Jeremy Witbeck {2:08}
Yeah, Jeff, and to be clear with our strategies, is this something that we do for our clients? Or is it something that they need to ask us to do?

Jeff Powell {2:15}
Now they don’t have to do it, we automatically do it within our portfolios. So what I would definitely say is, I mean, honestly, for our clients that we don’t manage 100% of their money, it would be good for them to perhaps share with us what they are doing away from us. So we can understand a you know, are they doing a good job, are they not doing a good job, but also, something that that is happening away from us might have a dire consequence on them financially. So keeping us in the loop with what’s happening, we can at times coordinate efforts. So if there is a big gain in one area, not that we really have any losses left to take care, but we would be able to offset most years, at least some of it so that that open communication is really key in order for us to be able to do our jobs as effectively as possible.

Jeremy Witbeck {3:02}
One last question here on this, Jeff, this is a an area that I see that people sometimes get tripped up, and that is the difference between long term versus short term, does it matter with regards to the two that they be matched perfectly? So for example, if I locked in, say, $50,000 of long term capital gains, do I have to have long term losses to offset that, or can I use short term as well,

Jeff Powell {3:26}
you normally need a term to match item for item is what you need to be doing. But But beyond that, I mean, like for example, let’s just say that you had a bunch of long term gains. You don’t want to offset those with short term losses, because the tax ramifications are different depending on where you are with the tax bracket. So you want to offset like like item to like item. And then if you’re not able to do it fully, then you carry it forward into the next year. And what you really want to do, again, is talk to your financial advisor about that, so that we can continue to offset as much as possible. And what we’re talking about with $1. Today, what we’re really talking about is inflation. And you know, also looking at $1, you know, the devaluation of the dollar dollar has been diminishing in value compared to its peers. But again, mentally, or if you’re looking at inflation, $1 tomorrow is gonna be worth 98 cents, 97 cents, so offsetting full dollar to full dollar now makes more sense than waiting next to waiting until next year, or it’s worth 97 cents or the year after that that’s worked on before you’re losing value by not taking advantage of offsetting as quickly as you possibly can in the current year that you can.

Jeremy Witbeck {4:39}
Yeah, no, I really appreciate that. And I think sometimes something that’s not as well known as that the tax code requires things to be netted together. And a short term loss, for example is worth more than a long term loss because the short term tax rates are much higher. And so the more that you can be proactive and really optimize that the better and that’s a great Conversation have with your plus wealth advisor, because lessons tax dollars are left on the table because it wasn’t done in a manner that’s the most optimal. So appreciate that explanation.

Jeff Powell {5:12}
So I think that your point is a strong enough one that we really need to drive home the point. So somebody is in the highest tax bracket, they’re getting taxed at 37%. On ordinary income, their capital gains is at 20. So if you have a short term loss, and you’re offsetting it against a long term game, you know, 37, against 20, you’re losing money by offsetting that in that fashion. So while it’s not a requirement is something that you should be doing on an active basis in order to take advantage of it as much as possible, which is why I kind of hesitated a little bit, because the tax laws and his past didn’t require, you know, matching, like the like, but for tax purposes and maximizing your dollar is really what we’re talking about why you want to do that, rather than being required to do it.

Jeremy Witbeck {6:03}
And, Jeff, as we go into 2021, another area that we have a limited amount of time left is to try to reduce the amount of income that’s recognized for the year, any strategies that you have, that you recommend to people to try to reduce the income that they’re going to pay taxes on?

Jeff Powell {6:22}
Well, another one that jumps out as if you haven’t maxed out your retirement plan to do so. If you work for yourself, you could set up an individual 401k plan, for example, and depending on your age, max it out. So you’re either in the 19, unchanged range, or you’re up and 20, mid 20,000 range of what you can max out your number. So again, 19, five, or you’re up at $26,000. For maximum. If you’re doing catch up revisions, you can also pair that, again, got to do it this year, and it’s gonna be tricky to get it done and funded. But you could also pair that with a profit sharing plan. So you could in theory, I mean, if you’re making $100,000, for example, you could take that first $26,000 and set that aside, Max that out, and then get the remainder of what you’re doing within your portfolio and throw that into a profit sharing plan, you could take another 25% of that. So $18,500 would be what you’d be able to put in to your profit sharing plan on top of the 26,000. So you’ll be able to set aside for yourself a total of $44,500, which would obviously have a pretty material difference on what you’re going to end up paying the government you can either pay them based upon making 100 grand and setting aside no money for yourself, or setting aside $44,000 pre tax and don’t have to pay them anything on that money. So it runs the chance of knocking you down. And depending on you know, if you’re filing single or joint or whatever, it might even lower you in tax brackets in order to be able to do that. So that’s one that we we suggest significantly. I think a lot of people are also kind of forgetting about gifting in a year, like this year, where you’re running into situations where parents, you know, they’ve they’ve gotten a little bit financially hurt in the beginning of the year, they kind of put it in the back of their mind that they were thinking about doing their annual gifting to the children down a level. But it’s a great way of being able to pass on long term wealth. Keep in mind that you have over $11 million lifetime credit. But it’s $15,000 per person per year. So we’re in the last couple weeks of the year, I’ve actually run into this a couple conversations with clients, just in the last week or two were kids going out and buying a property or something along those lines. The parents really want to pass on wealth. But one of the easiest ways of doing it, gift them now. I mean, two parents, one child, you’re talking about being able to do 30,000. If that child’s married, you could double it. So husband wife pass on money to their son, that’s 30,000 husband and wife pass on money to their daughter in law, there’s another 30,000. So you could be splitting $60,000 towards their down deposit right now. And you could replicate it in a couple weeks. And all of a sudden you’re talking about $120,000 that you’ve passed from one generation to the other without any tax ramifications, nor as attacks nor is it going against their lifetime exemption. So just another thing to think about if you do gift, and you’re worth thinking about doing that, and you’re thinking about your RAMs, that to go ahead and do that. The other really major thing that I’m hearing a lot of, again, going back to kind of the Year End planning, as a lot of people are calling almost in a panic like oh my gosh, I don’t think I’ve taken my required minimum distribution for the year. Yes, you know, just a reminder, there isn’t one this year so with the cares act, there’s no required minimum distribution. A lot of our clients, however, have in days past use that to give that money directly to charity. So then the question becomes, okay, well, I still want to do my annual charitable gifts, which, again, is something for tax planning to be to be doing now, our suggestion is obviously to not take it out of the require there the required minimum distribution for this year, it’s to take another taxable account. And actually, rather than offsetting the taxes that they’d normally pay with taking their RMD, to actually get a real tax credit. So it’s another thing that they should be talking to their accountant in advance saying, oh, by the way, I’ve got this money. I’m setting it aside, I’m setting aside 10 grand for, you know, my five, three or four favorite charities that I’m sending money to how does that impact my taxes? So again, might be something that lowers your overall tax bracket.

Jeremy Witbeck {10:45}
Jeff, that’s a that’s a great suggestion, any recommendations as to the type of stock that people should plan on passing over to a qualified charity? So for example, should they be doing stocks in relatively flat depreciated appreciate in value? Are there any benefits to one over the other?

Jeff Powell {11:02}
So if you’re giving money to a charity, obviously, the more highly appreciated the investment, the better. Because when it goes over to a 501, c three company, when they sell it, it’s done completely without taxes, and you’re passing on something. So if you’re going to set aside $10,000, and you’ve got $1,000 cost basis on it, you’re not paying anything for the capital gain. So when giving money to charity, if you want to give a highly appreciated investment, like stock to them, that’s the best way of doing it. When you’re trying to give to your children on the hand and trying to maximize it, you want to do the exact opposite, you want to sit there and either give them cash, or give them something that hasn’t appreciated because the child will assume your tax basis. So if you were to turn around in the same situation and give one of your boys, for example, Jeremy, at $10,000, gift of stock at 1000, our cost basis, they would sell it, they would have to pay taxes on the $9,000 gain. So it doesn’t really become a $10,000 gift anymore. It’s a $10,000 gift minus the tax ramifications.

Jeremy Witbeck {12:09}
That’s a great point. And Jeff, I think that’s one of the often overlooked strategies is that you can get away some of your appreciated stock. And if you feel that strongly about it, you can take what you would have given the charity and cash and just repurchase it and reset your cost basis. So one of the things that you can do to try to minimize your your taxes there. Jeff, another one that’s come up. And this is especially attractive, because there’s not an RMD requirement for 2020 that’s potentially doing Roth conversions. Can you kind of walk through why that might be desirable this year. And what that is?

Jeff Powell {12:42}
Well, I mean, doing a Roth conversion is when you’re taking money from a type of IRA, where you’ve had no deductible, or you’ve had, it’s 100% taxable money, you don’t want to be doing this with a contributory IRA, where you’ve had no ability to deduct it, because some of that’s already built into it. But typically, what you’re doing is you’re moving money from an IRA rollover into a Roth, converting it now in today’s dollars, knowing that in the future, that you will not have to pay any taxes on it, but you’re willing to pay taxes today to convert in order to be able to have that money being left alone in the future and not have yourself subjected to things like required minimum distributions.

Jeremy Witbeck {13:25}
And one of the reasons why I mentioned this strategy might be attractive today is because there’s not an RMD requirements. A lot of times people are having much less income or finance this year, and they may be in a very low tax bracket. And so we certainly can utilize some of that with the Roth conversion this year. And take advantage of what are probably going to be some of the lower tax brackets that we see. And that kind of brings us to the last point which is looking forward in the 2021. There’s been a lot of talk about the tax brackets and if they’re going to change or not change, can you just share us a little bit as to what may be happening and just how we should think or plan for that going forward?

Jeff Powell {14:03}
I think you got to look at the kind of on two levels. Jeremie gonna look at the state level as well as on the federal level. If you’re looking at what COVID has done to this country, from a support standpoint, almost every state is suffering financial aid. And a lot of the states throughout the United States are talking about increasing taxes as an offset to that, that they need to either build off of property taxes, state income taxes, whatever else that you’re talking about. There’s a city california has stuff I’ve been talking about it as as have many other states that are out there. So you want to certainly be being eyeing it from a state level but on top of it on a federal level. The federal level really kind of comes down to early January with the senatorial elections in Georgia. Georgia, goes completely blue than the likelihood of having a federal tax increase. substantial. If we’re looking at having a republican controlled Senate, I think that the probability is go down. And so really, again, if you’re trying to make some decisions, this year, we’re trying to predict what’s going to happen with taxes in the next, you just may want to hedge your bets. I mean, I’m not normally one to try to guess at what our government is going to do. It’s typically something that’s not best. But if you are concerned that the taxes are going to increase this year, then realizing gains and today’s dollars was it’s not fun, maybe a lot better than having tomorrow’s dollars, but having it at a higher tax bracket. So something worth at least looking at. So kind of back to what you were saying with the Roth conversions with having a potentially lower income, we certainly seen a rebound going on with regard to employment. It’s not saying necessarily that wages are going up. So even though we have had a high savings rate, we’ve had a rebound in employment, if you’ve had a disruption in your income, and you’ve got a you know, other ways of looking at doing a conversion during the course of this year, or taking advantage of some of the other things that we’re talking about with setting aside the maximum you possibly can, at retirement, again, will have a much greater benefit for you on a longer term basis.

Jeremy Witbeck {16:21} 

Those are all really great points, just and certainly something that we’ll be getting a lot more information on in the upcoming weeks, I think the thing that I’d like to leave it with is there’s a lot that we can do to plan for, for taxes. And we’re certainly just the tip of the iceberg, especially when it comes to retirement plans and, and things that take a little bit more time to to successfully implement. But one thing I’d like to say to our audience is that if any of these are even remotely hitting home schedule a time to speak with your wealth advisor, so there’s still time to get these things done. And we can make a significant impact on the 2020 tax filing that comes here on April 15. So as always, Jeff really appreciate your time, your expertise and the strategies they shared with respect. Reports good talking with you as well and so everyone happy holidays and as always be safe, be healthy. 

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