Don't Let Hindsight be 2020: Planning Strategies for Year-end

December 01, 2020

The end is near (year-end that is) and a new year is about to begin. Where do you stand financially? What are your goals for the next year? What did you accomplish this year? Where do you want to be in five or ten years?

It is always a good time to think about planning, but at year-end it is crucial to make sure you have taken advantage of any planning tools that expire before the year is over. Within the last few years, several pieces of legislation have presented financial planning opportunities, including the PATH Act of 2015, Tax Cuts and Jobs Act of 2017 (TCJA), the SECURE Act (2019), and the CARES Act (2020).
So – where do you get started?

RMDs (Required Minimum Distributions)
The SECURE Act raised the starting age for taking RMDs to 72. With the recently passed CARES Act, the legislature made RMDs optional for 2020. In addition, 2019 RMDs that were delayed to 2020 are not required. Many folks take their RMD, pay taxes on it, and then invest the proceeds in a non-retirement account because they do not need the income. This year, those funds can be left in the IRA to continue to grow tax-deferred and reduce taxable income for 2020.
The Protecting Americans From Tax Hikes (PATH) Act of 2015 made “qualifying charitable distributions” from traditional IRAs and Roth IRAs permanent. This allows an individual to direct from the IRA trustee a contribution to a qualifying charitable organization up to $100,000, provided there is no intervening possession by the IRA owner who is at least 70 ½ years of age. This avoids triggering the 50 percent of the Adjusted Gross Income (AGI) limit. The transfer can satisfy the donor's Required Minimum Distribution (RMD) for the tax year.

Roth IRA Conversions
Now may be a good time to consider converting all or some of your IRA to a Roth, converting pre-tax dollars to post-tax dollars. Typically, if you are required to take an RMD, you would need to take out your RMD first and then convert your IRA to the Roth. With the CARES Act suspending the need to take an RMD, you can convert the entire IRA. Many factors, including those listed below, should be considered before doing a conversion, and your accountant should be part of the discussion.

  • Possible increased tax bracket
  • Possible increased tax bracket
  • Impact of the increased income on income-related healthcare costs
  • Method of paying the taxes on the conversion. It may be more beneficial for you to pay the taxes on the conversion from an outside source to increase the amount retained within the Roth for future growth.


It may be a good time to consider family gifts, including individual equities, equity mutual funds, or ETFs, cash gifts to 529 plans, and/or making cash gifts to family members. These gifts may allow them to contribute to eligible retirement plans such as Roth and Traditional IRAs.

Stock/Equity gifts – If you have a stock that has declined in value, you may be eligible to give more shares away at lower values.

529 Plans – you may gift up to $15,000 per beneficiary and can front-load up to 5 years of contributions for a total of $75,000 with no further contributions until four more years have passed. If you invest $15,000 at the birth of your grandchild and it grows at 8%, that initial investment would be worth $59,940 at his/her 18th birthday.

Some other changes to 529 Plans from the SECURE Act:

  • Funds may be used for qualified expenses associated with registered apprenticeships, such as fees, books, supplies, and equipment.
  • Funds may be used for qualified expenses associated with registered apprenticeships, such as fees, books, supplies, and equipment.
  • $10,000 per year can be used for tuition at K-12 education at public, religious, or private elementary or secondary schools.
  • Up to $10,000 can be used to repay qualified educational loans, including both principal and interest. An additional $10,000 can be used to pay for a sibling’s loans.

Donor-Advised Fund (DAF)

A donor advised fund is a charitable giving vehicle administered by a public charity to manage donations on behalf of the donors. An advantage is that the assets can be managed professionally for a fraction of the cost of setting up your own private foundation. Donations to a DAF qualify for an immediate tax deduction, grow tax-deferred, and allow for grants over time.

The 2017 Tax Cuts and Jobs Act (TCJA) expanded the standard deduction from $6500 to $12,000 for single filers and $13,000 to $24,000 for joint filers in 2018. In 2020, the standard deduction is $12,400 for single filers and $24,800 for joint filers.

If over 65, each individual gets an additional $1300 added to their standard deduction for joint filers, and single filers get a deduction of $1650. Because of the increase in standard deductions, many taxpayers’ itemized deductions, including gifts to charities, do not exceed the standard deduction. What do you do if you want to claim a deduction for a gift to charity? The answer can be making a larger gift to a Donor Advised Fund that exceeds the standard deduction and then use the funds from the donor-advised funds to make future gifts.

Estate Taxes
For 2020, the unified federal gift and estate tax exemption is $11.58 million. The tax rate on cumulative lifetime gifts above the exemption is a flat 40%. The tax rate on the estate of an individual who dies this year with an estate valued greater than the exemption is a flat 40%. The Federal exemption reverts to $5 million when some of the provisions of the 2017 Tax Act (TCJA) expire, so now may be a good time to move assets out of your estate if that is a priority.

The Maine estate tax works as follows for 2020: the first $5.8 million of a resident decedent's estate is exempt from tax; the tax is 8% on the amount between $5.8 million and $8.8 million; and 10% on the amount between $8.8 million and $11.8 million with 12% on the excess.

Are your wills and Powers of Attorney (POA) up to date? While we want to make sure that folks use any of the exemptions from the 2017 TCJA, most estates are well below those limits and are not affected. What is more important is having your wills current and making sure that you have both medical and financial powers of attorney in place. If you do not have a written will, the state has one for you, and it may not be what you wish. If it has been more than five years or if there have been any significant changes in your life, it is an excellent time to connect with your attorney.

Income Taxes
As you prepare to gather your information for filing your taxes, it may be a good time to touch base with your accountant or other tax professional. If you have assets such as stocks, bonds, or mutual funds that are less than what you paid for them, then you could consider selling them at a loss and using those losses to offset any gains that you might have on other property. You can also use up to $3000 in capital losses to offset income in any year. Any losses not used in that year can be carried forward and used to offset gains in future years or $3000 per year in income until they are used up. Note that if you sell a stock or other investment, you must wait 30 days before you buy it back to not trigger the wash-sale rule. The wash-sale rule prohibits selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. If you do have a wash-sale, the IRS will not allow you to write off the investment loss, which could make your taxes for the year higher than you expected.

It has been a long, strange year, and we have had to learn to adapt to our current situation, spending more time at home and less time socializing. Some have spent more time with family, while others have had less. This will change. Things will improve. As we come into the new year, think about what is important to you. Use this time to reflect and make sure your finances are on track for reaching your goals. The future can be scary, but with proper planning, it can also be very exciting.