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Year-end tax strategies in light of a return to normalcy

The winner of the presidential election this weekend will put us on a path toward normalization of tax policy, trade, and geopolitics. Investment markets may be the only thing unaffected in the intermediate-term since this has largely been driven by a separate government entity, the Federal Reserve, and only until they make a change in rate policy. Considering the enormous national deficit of $24t, a move to address this issue is necessary and expected with the new administration. Meanwhile, with the couple months left until Joe Biden's inauguration, this may be an opportune time to implement some tax strategies considering what we know so far with regard to future tax policy changes.

President Biden will increase tax rates for income earners over $400,000/year and reverse some, if not all, of the changes from The Tax Jobs and Cuts Act that went into effect in 2017. If successful, the repeal of this Act may help some Americans who live in states with high state tax that can’t be currently deductible against federal taxes.

Tax strategies

Roth conversion: Traditional IRAs and pre-tax 401(ks)s are tax-deductible when making the contribution in the year that they were made. In the future, during retirement, pulling this money out means taxing it at the rate at that time. If tax rates are higher in the future, which is to be expected, consider implementing a Roth conversion now to lock in current rates. Note that the amount you convert should be determined by your tax advisor as too much might throw you into a higher tax rate, sometimes unnecessarily.

Invest in tax-advantaged accounts such as a Health Savings Account, Roth IRA, or a Traditional IRA. Knowing that a taxable account will be subject to higher tax rates in the future, the value of tax-sheltered accounts becomes more pronounced. These accounts tax-shelter any realization of capital gains and dividends and allow for tax-free, compounding performance over time.

  • If employed, make sure that you'll reach your 401k maximum this year of $19,500, $26,000 if over 50.

  • If self-employed, consider opening and funding an Individual 401K where you can defer $57,000, or $63,500 if you’re over 50.

  • If you have a high-deductible health care plan, open and fund a Health Savings Account (HSA) for $3,350 single or $7,100 married; plus another $1,000 if over 55. Contributions are tax-deductible, can be invested federal tax-free, and distributed tax-free if used on qualified medical expenses.

  • If you've maxed out all of your traditional sheltering options, consider cash value life insurance or an annuity that can also provide for tax shelter on investments.

Unorthodox strategies

  • Invoice now for work not to be done until next year. If possible, charge now for services rendered in the future in order to lock that income in at current tax rates.

  • If you are sitting on high unrealized capital gains with your investments, consider selling and repurchasing them in order to obtain a step-up in basis.

  • Gift assets to kids or to an irrevocable trust so that those assets will be taxed at either your kids’ or trust tax rates if they are lower.

Wall Street’s two biggest concerns are the corporate tax increase back to 28% from 21% and an increase in capital gains tax and dividends for those earning more than $400,000. I think they would warn of an equity sell-off in anticipation of these new taxes, however, I'm not sure where investors would put their proceeds. Considering interest rates are at all-time lows, they won't find any wealth creation opportunities in any other asset class other than equities. After a brief bout of any volatility, I assume the market would sort itself out and remain in the continuation of the current trend.

At Eureka Wealth Management I'll keep you posted on additional strategies that surface depending on your unique financial situation. I also do retirement planning, insurance, and investment management. Call for free, initial consultation at (760) 537-0791 or book online at Consult your tax advisor for tax-related questions.



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