End Of Year Planning Tasks

Let’s explore some of the things you should be thinking about and checking on as we wrap up 2020 and begin 2021.

Important Links

Website: http://www.yourplanningpros.com

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Transcript Of Today's Show:

Speaker 1: Hey everybody, welcome in to Plan With the Tax Man. Thanks for tuning into the podcast. We appreciate your time as always, as Tony and I talk investing, finance and retirement and this week on the podcast, end of year planning tasks. It might be a little bit late in the season for some of these, but these could also be some items to look at at the beginning of 2021, or as we get into that. And of course, yay. 2021 is almost here, so excitement there as well. But let's say hey to Tony first before we get into this topic. What's going on my friend, how are you?

 

Tony: I'm doing good. I'm hanging in, weather's good here in this part of the state. In fact it's actually 60s.

 

Speaker 1: Nice.

 

Tony: But winter weather is around the corner for us. This weekend is supposed to be quite snowy.

 

Speaker 1: Oh okay, yeah. Yeah. We are into December, this will be our December 10th edition of the podcast. Yeah, as we've shared before, I'm down in North Carolina. You're there in Iowa. It was 23 yesterday morning. It was pretty chilly for us to be that cold down here. But yeah, we're going to be I think 70 tomorrow or something like that at the time we're taping this. Can't complain too much. I'll take it. We don't typically ... we actually had a couple of flurries when it was 23, just a few, literally just saw a couple flurries. But that was it. We don't typically get a whole lot. But when we do, everybody loses their mind.

 

Tony: I'll bet.

 

Speaker 1: For sure. Well, let's talk about these end-of-year planning tasks, Tony, that I mentioned earlier. I've got a couple items here. Again, some of these may or may not be too late. I'll let you tell us, but maybe these are things we can also think about as the New Year rolls on to us here. Let's start with, again, if you can, and if you're still working, depending on what's happened, obviously with Corona and so on and so forth and your job situation, but should we be maxing out retirement contribution if possible?

 

Tony: I think you can. This has always been my favorite number one every year go-to for tax advice and of course saving for retirement. I'm putting back on my tax hat here in this podcast a little bit. Because you know what? The retirement plan contributions, whether you've got a 401k or you're just in a Roth on your own or a traditional on your own is still one of the best deals around, especially when you couple, if you're going to do something on a tax-deferred basis, you've got a great tax deduction. You feel like you're saving taxes, you're saving for retirement, which you need to be doing anyway? So yes, if you can and you've got a 401k at work, I would try to stuff as much in as you can. Obviously we've only got a month left.

 

Speaker 1: That's usually payroll based, right, Tony?

 

Tony: Yes.

 

Speaker 1: You would probably need to notify or do whatever pretty quickly here.

 

Tony: You have to notify them. But this is something that carries over into '21, is you certainly can ramp it up over the next year. You always want to be ramping it up. It isn't something that has to be done this month. But if you can and are working, that would be good.

 

Tony: If you don't have a 401k, you've got a Roth or a traditional IRA, even though you don't get the tax deduction with the Roth, I would try to stuff as much money into it as you can. Again, going back to the financial planning aspect of it. We always need to be doing this. I see a lot of people that have them available, especially through work, and are not taking advantage of it. I think that's a real mistake.

 

Speaker 1: Yeah. Typically this is what? December 31st timeline based for these?

 

Tony: Most of the time it is. If you've got Roth or traditional IRA, and you can go all the way out to April 15th of next year and count it for this year. Same way with SEPs and some of the other little self-employed programs as well. You want to check with your advisor on that. But in 401ks, most of the time you can just ... unless they've got only certain times you can add to them, go in and tell your HR that I want to up my contribution.

 

Speaker 1: Okay. Right. Exactly. All right. Well good. That's a good little tip here for the end of year planning. Should we revisit or review some of the things, especially if we are a retiree or actually really even a ... well, yeah, definitely a retiree more so maybe than a pre-retiree. But that's even possible as well. Some of the things that they gave to us, I suppose, with the CARES Act earlier this year, obviously at this point, you've hopefully had a conversation about your RMDs not being required, what you may or may not want to do with it should you have chosen to take it or whether or not you decided to do pull any money out without the penalty? Basically some of the things that we've talked about here on the show with the CARES Act.

 

Tony: Yeah, exactly. This, once again, a little bit of a tax issue, a little bit of a planning issue, that if you haven't got any advice on this from your tax person, maybe ask them about it. We generally send out ... we already sent ours out to our existing clients about what's in the CARES Act and what relief is out there.

 

Tony: You could Google it and get some information there. But a couple of things, especially for the retirees, if it's been a tough year or maybe you just don't need the money and you don't want to take the RMD out of your retirement plan, that you can postpone that. There's going to be no penalties like they're normally. That might be helpful for some people.

 

Tony: Most people that have been devastated by the COVID basically are going to get some tax deductions that they don't normally get there's an array of them. So it may or may not fit your situation. They're not going to be an end all where it's just going to magically reduce your tax bill to zero. But you do want to take advantage of, and one is a very small one, but I think most of us will qualify for this, is that in this year, you can actually take a very small, it's only 300 bucks deduction, of what they call above-the-line, meaning that even if you don't itemize your deductions for charitable contributions, most of us give $300 away in some form or fashion. But under this new tax law, a lot of us aren't itemizing like we used to because the limits are so high. There's some little quirky things in there. You want to make sure that your tax person is going to ask you. Or if you're doing them on your own, you want to take advantage of, for sure.

 

Speaker 1: Well, I'm going to jump to that one because that was on my list. Maybe you could expand upon that. You covered a bit of it already. I was going to ask you, should we evaluate some tax deductible charitable contributions? Because look, we all know industries, lots of industries have suffered greatly through the pandemic. Charities are no exception. Now don't get me wrong. If you want to donate, or you donate to charities because that's what you feel is the right thing for you to do a tax deductible in this situation shouldn't really dictate whether you're going to do it. But if you can help yourself a little bit along the way, I don't think there's anything wrong with that. Anything we need to notice from our timeline-wise, that might be pertinent aside from some of the things you've already mentioned, like those date of deductions and so on and so forth?

 

Tony: I think the big thing to realize and what a lot of people didn't do last year was they thought about not giving as much because of the tax deduction or lack thereof. What they forget, though, is in your state, obviously most States have a tax and you still can ... the state standard deduction limits are much lower than the federal is right now. You can still feel like you get some bang for your buck because on the tax side, on the state level. I wouldn't let the ... well, like you said, we should be giving because we want to give, not just for the tax deduction. But in reality, a lot of people tie it to that. But I wouldn't forego giving just because you might be limited on the federal side, because you will get a good bang still out of the state. You don't never know when they're going to change this back. The current tax law is supposed to expire in '25. But you know how that goes. We don't know what's going to happen.

 

Speaker 1: Yeah. We can't even resolve a Presidential election on time, let alone what's going to happen in the future.

 

Tony: Exactly. I tell people on charitables, again, depending on where you're at, well, just give more and get yourself over that a standard deduction. But you got to be able to balance it out [crosstalk 00:07:46]

 

Speaker 1: Well, that's a great point. I'm glad you brought that up. Because a lot of times we have gotten so used to the way we were doing things and that new change in the tax law with the standard deduction does kind of offset that for some folks. Certainly worth having a conversation with your advisor and your CPA as to how that relates. Really, any of this that we're talking about, double-check that information with them. Of course, if you're not working with one yet, and you're just reaching this podcast through one of Tony's email blasts or something along those lines, or you found us on Facebook or somebody shared it with you, give him a call if you have any questions at 844-707-7381 before you take any action, 844-707-7381 or stop by yourplanningpros.com. That's yourplanningpros.com. Tony has got 23 years plus in the industry. He's an EA and a CFP.

 

Speaker 1: Okay. Since we asked you about the tax deductible, I'll go back to another one in just a second, but let me continue on with the tax conversation. Probably too late for this Tony, and I'm not even really sure what some of this would be other than solar, maybe. But should we consider purchases that would give us a tax credit, like home improvements of some ... again, probably too late to get this done. But if you did do these, should you be bringing that up to your CPA?

 

Tony: Yeah. You definitely got to bring it up. Like you said, just on all of these topics, definitely check. Because the bad part about the tax code is it's not one size fits all. In other words, there's so many little nuances and it doesn't apply to everybody. You got to check that out. But the main big tax credits for individuals right now are solar. In other words, you install solar panels on your house. They have those residential windmills that you can put up that look like the big ones you see. They hook into your electrical grid and of course lower your electric bill, just like the solar. There's some huge tax credits for those.

 

Tony: Now that isn't something you just go out and buy at home Depot. They're pretty expensive. You know what I mean? They're $10, $15,000. But for some people that want that large tax credit and have the means and like the fact that they're contributing.

 

Tony: The last one is the geothermal. Again, not a small expense, but there's some big credits there. But like you say, this isn't something you can run out and get done in two weeks. That may have to be a 2021 issue. But it's something to think about.

 

Speaker 1: I know that, and again, with itemizing and standard deduction, maybe that's changed Tony. Obviously, this is not my forte. It's more yours. But if we put new windows in the house this year, things of that nature, do some of those things still work as far as when we're doing our 20 ... our next year's tax planning or tax prep? Because I know there used to be some tax credits for home modifications that helped reduce energy efficiency.

 

Tony: They did do that. Unfortunately, the credits for windows and furnaces and some of that stuff have expired.

 

Speaker 1: Roofs and stuff. Oh, okay.

 

Tony: Yeah. It's no longer on the books. Keep in mind, a lot of people confuse a credit with a deduction. A tax credit is much, much better than a deduction because it comes right off the bottom line of your tax. The deduction only reduces your income-

 

Speaker 1: Gotcha.

 

Tony: And figures the tax. These credits are valuable if you have a need for them. But yeah, they did have one, if you remember a few years back, for electric cars. That's off the books now, too.

 

Speaker 1: Oh, okay. Yeah. See? That's why we do the show, Plan with the Tax Man. Because you got to plan and you got to have that tax component. Always thinking about the taxes is certainly a key component into retirement planning anyway. It's one, sometimes, we often overlook. One of the good things about having both of those wheelhouses, if you will, in Tony Mauro.

 

Speaker 1: All right, let's keep moving along here. Another tax conversation, tax loss harvesting, explore those possibilities, Tony. Too late? Well, A, what is it? And is it too late for 2020? Or what should we be looking at there?

 

Tony: Tax loss harvesting basically is for people that have some ... obviously they've got a portfolio. They may have some gains. They can use anything in their portfolio that maybe they have a loss on to maybe dump that or even if they're not going to sell anything at a gain, tax loss harvesting means basically taking your dogs and selling them and you can write off your losses. Now the good news in the tax code is that you can write off your losses all the way up to the extent of your gains, plus an extra $3,000 every single year. Then you can carry forward the loss, if you just have losses and you've got too many. You can only write off 3000 a year, but you can use the rest of them next year. The tax loss harvesting is more for, "Okay, what have I made money in? Maybe I should sell some of that. I'm worried about the taxes, but I'll get rid of some of the things that just haven't done well, and I can offset that and use that money to reinvest possibly."

 

Speaker 1: Shake off some of the dogs, if you will. Right?

 

Tony: Yeah. Most of the time, that you're talking more for, I think, people that trade a lot. That's really not mostly our client makeup. But there are a lot of people out there doing that, trading frequently, and worried about that. I mean, for us, I don't recommend trading a lot. But that's going to go to contrary to what maybe what some people listening saying, oh, that, "I like it and I'm still going to do it." But I think over the long run, what you end up with is more losses than gains. So that kind of goes against traditional planning advice.

 

Speaker 1: Okay. All right. A lot of good options here. There are a lot of things to consider for our planning task list, whether it's the end of 2020 or starting into 2021. Let's finish off with the final one here, Tony, and that is the Roth conversion conversation. Determine whether or not this makes sense for you. This has been a hot topic for obviously a number of years. Now you, as a professional, has been doing this for a long time, have obviously known about conversions for a long time. But I think a lot of us, it's become a hot button issue for standard folks. Right now we're learning more about it. We're hearing more about it on the regular. People have been very intrigued about reducing their future tax bill through doing conversions. It's not for everybody, but it's certainly worth a conversation and will probably continue to be so while we know what the tax rates are versus what they may or may not go to down the line.

 

Tony: That's correct. I'll put in my one shameless plug, if somebody is listening, because I did write a short book on it. If they want a copy, certainly can just shoot me an email or give us a call. But really what it's about is as the Roth becomes more and more known, there is a conversion feature that the government allows you to basically take money out of a tax deferred plan, which is the ticking time bomb, because Uncle Sam has got a right to that money later. You can convert that to a Roth, without penalty, and you just pay the tax that's due on whatever you convert.

 

Tony: Now, the key is trying to ... this is a little bit of planning and tax moves at the same time ... is trying to fill up or convert just enough to keep you in the same tax bracket, so you don't pay more taxes than you need to. You know you're going to pay some, but there's no penalty. You just keep converting chunks while you're in the bracket you're in. That way, eventually you've got it all converted and now Uncle Sam has no right to any earnings in the future.

 

Speaker 1: We don't want to go in and just wholesale switch it all over because we'll bump ourselves up. Just kind of chip away at that ice block a little bit at a time.

 

Tony: A little bit at a time. It makes a lot of sense, especially if you've got a big balance in a 401k, a traditional 401k, possibly an IRA type of thing, is getting the tax ... the tax rates are very low now. We don't know, like I said, what's it going to be in 10 years from now? I always look at it from the tax side is our government, whoever's in power, we spend more than we take in. Nobody politically wants to just say, "Hey, we're raising taxes," but eventually they got to get it somehow.

 

Speaker 1: Well, I mean, our President elect has already talked about doing it. So I mean...

 

Tony: They're talking about it. From a business standpoint, personal standpoint, nobody likes to pay taxes. But if you're running the business of the government, they're short of money now. They try to get-

 

Speaker 1: They don't make anything. They don't sell anything, a product. They got to tax us.

 

Tony: They get it from us. So if you've got these big balances in, that's a scary position to be in. If you've really have got a lot and you've got estate tax problems, then that just adds to it.

 

Speaker 1: Yeah. Great point.

 

Tony: There's definitely a conversation to have with your advisor.

 

Speaker 1: Well and regardless of how you feel about whatever politically, you can just look at it from this standpoint: whether anything happens or changes, these tax rates are going to sunset in 2025.

 

Tony: Supposedly, yeah.

 

Speaker 1: Yeah. So whether nothing gets done, we've got for about four years or so to continue chipping away, as Tony mentioned, at this tax time bomb. But again, something could ... taxes could be changed. Of course, it's got to go through Congress and all those kinds of stuff. But that's still possible coming up as well, sooner than that. Either way you slice it, have the conversation to see if it's the right thing for you. Again, every scenario is different. But it could be very beneficial to chat with Tony about how to reduce your future tax liability or future tax bombs. Not what you make, as the saying goes, it's what you keep.

 

Speaker 1: That's some end-of-year planning tasks, some ideas to think about, or some tweaks to make as you go into 2021. Of course, one tweak you should make is if you're not working with an advisor, get on it, have a conversation. Usually there's no cost or obligation to start the initial process and chit chat with somebody and see how it stands for you. We talk in generalities, we try to share some ideas and things on the podcast or other shows you may listen to. But at the end of the day, it really comes down to your unique situation. Reach out to Tony, do yourself and your retirement a favor. Have those conversations. If not this year, definitely start in the first quarter of next year.

 

Speaker 1: You can call Tony, as he mentioned, if you'd like to get a copy of his book, (844) 707-7381. that's (844) 707-7381. Or you can stop the website, yourplanningpros.com and shoot them an email. That's yourplanningpros.com. Don't forget to subscribe to the podcast as well, Plan with the Tax Man, on Apple, Google, Spotify, iHeart, Stitcher, whatever platform you choose.

 

Speaker 1: That's going to do it this week. Thanks for your time as always. We appreciate it. Tony, my friend have yourself a wonderful first part of December. I'll talk to you in a couple of weeks.

 

Tony: All right. Sounds good. Take care.

 

Speaker 1: Thank you, sir. We'll see you next time here on plan with the tax man with Tony Mauro from Tax Doctor Inc, here in the central Iowa area. We'll see you next time folks. Bye bye.