6 Tax Saving Opportunities Opened Up By New Tax Rules
The Tax Cut and Jobs Act (TCJA) passed at the end of 2017 and SECURE (Setting
Every Community Up for Retirement Enhancement) Act passed at the end of 2019
radically changed your tax picture.1
Most Americans are going to pay less in taxes under the tax brackets, and few are going to use this great
opportunity to permanently lower the taxes they pay.
The multiple COVID-19 pandemic and relief acts also spurred new tax wrinkles you
should know about.
The 2017 rules are scheduled to expire in 2025 (if they do not disappear sooner
under a new administration), and most taxpayers will see a tax hike.2
To reduce the impact of the new tax laws on government revenue, the IRS changed
how it increases things like thresholds, deductions, and credits for inflation.3
It sounds like a minor procedural move, but it is a big deal. In plain English, this
change means that many taxpayers will creep into higher tax brackets as their
incomes brow because the tax brackets themselves will not increase as much as
they used to for inflation.
Bottom line: many taxpayers will pay more in taxes over the next few years due to
this hidden tax increase. It might be only a few hundred dollars every year, but over
time, even small tax increases add up! Unless you take steps now to reduce your
taxable income.
All 6 opportunities in this guide are actions you can take right now to potentially
lower your taxes this year and, in the years, to come. We strongly recommend that
you take this list, along with your tax return, to your CPA and financial adviser
(which may be us!) to see which tax reduction opportunities have opened for you.
1.Take the Standard Deduction Later
The new tax rules dearly doubled the standard deduction and did away with many
write-offs, removing the tax benefit of itemizing deductions for most taxpayers.4
However, an old accounting trick means you can still optimize your deductions
under the new rules by “bunching” itemized deductions in a single year to get over
the standard deduction threshold and then taking the standard deductions the
following year – potentially maximizing your tax savings multiple years in a row.
2.Pre-Pay Your Medical Expenses
Have major medical-related expenses coming up? You can potentially maximize the
tax deduction by pre-paying your out-of-pocket medical expenses for the year to
get above the standard deduction amount and meet the 7.5% AGI threshold (and
maybe even get a discount for paying up front). What kind of medical expenses
qualify? A surprising number, including unreimbursed doctor fees, long-0term care
premiums, certain Medicare plans, and some home modifications.5
3. Give Money to Your Favorite Charity Right from Your IRA (New SECURE Act
Opportunity)
Even though the SECURE Act changed the age at which your RMDs must start from
70 ½ to 72, you still have the right to make Qualified Charitable Distributions
directly from your IRA to a qualifying charity once your 70 ½, allowing you to
exclude up to $100,000 from your gross income (with certain restrictions).6
Even though the CARES Act allowed RMDs to be skipped in 2020, you can still make a
QCD this year.
4. Lower Your Taxable Income with a Roth Conversion (But Do-Overs Are Done!)
A Roth conversion is a great way to permanently lower your taxable income in
retirement by converting tax-deferred assets into tax-free assets and paying taxes
on the conversion in an optimal tax year (like under today’s favorable tax brackets
or your retirement assets lost value this year). For example, if you are a married
couple filing joining and your household earned $250,000 in taxable income in
2019, your effective tax rate is 19.34%, while it was 23.09% under the old rules.7
Unless you expect your taxes to be lower in future years, now may be an ideal
opportunity for a Roth Conversion.
Under the old rules, you could choose to reverse a Roth conversion (called a
recharacterization) and eliminate the tax bill. That loophole is gone, meaning once
you convert that IRA to a Roth, you do not get a do-over.8
So you really must look at all the variables and pick the right time for the move. We can review your options
together and choose the optimal strategy for you.
5. Review How You Are Paying Your Investment Fees
Prior to the TCJA, you could write off some of the fees you pay for investment
management. The TCJA did away with that deduction, but there are still ways to pay
fees with pre-tax dollars, if they make sense considering your overall financial goals
and investment performance. That is why we run the numbers with clients to
potentially maximize the after-tax return on their investments – not just the market
return.
6.Optimize Your Retirement Contributions
The TCJA and SECURE Act introduced many changes to tax rules. The 2020 CARES
Act also temporarily changed certain tax requirements, making tax planning even
more critical this year.
The most important step you can take right now to reduce your taxes this year may
be to review how and where you are making retirement contributions. Why?
Because you may be missing out on critical tax savings (and investment growth) if
you are not optimizing your contributions. Depending on how close you are to
retirement and your overall financial picture, you might be better off splitting
contributions between retirement accounts or even diverting your contributions
elsewhere to reduce debt (such as mortgage interest is no longer deductible). We
can run the numbers together if you would like a professional opinion.
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Special COVID-19 Considerations That Could Affect You
1. Economic Stimulus check
If you did not get a check from the IRS yet and think you are owed, do not worry.
Since it is technically an advance refund of a 2020 tax credit, if eligible, you will
receive it after filing your 2020 taxes. Important!! You do not owe income taxes on
your stimulus payment, nor must you pay it back.9
2. Payroll Tax Holiday
In September, the IRS issued a payroll tax holiday, allowing employers to stop
withholding Social Security taxes until the end of 2020. Important! If your employer
paused your payroll taxes, you may get smaller paychecks in 2021 until the
deferred taxes are paid off.10
3. 529 Refunds
If you withdrew money from a 529 to pay for college expenses that were refunded,
you will want to return the money to the 529 as a “recontribution” within 60-days of
the refund so that it is not taxed or penalized as a non-qualified distribution. Too
late for that? You can also use the funds for other qualified educational expenses
(such as computers, internet, or student loans) within the same tax year.11
4. 401(k)/IRA Withdrawals
If you need to make COVID-related emergency withdrawals from your IRA or
workplace plan (we do not advocate this in most circumstances), do it before year-
end to avoid the 10% penalty that normally applies if you are under 59 ½. You will
be able to stretch out the income taxes on the withdrawal over the next three
years. Important!! Be sure to speak to your plan administrator soon to make sure
this distribution option is available to you.12
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The TCJA and SECURE Act introduced many changes to tax rules. The 2020 CARES
Act also temporarily changed certain tax requirements, making tax planning even
more critical this year. We are financial planners who help clients use the new tax
rules to uncover opportunities, identify risks, and keep more of their money working
for them. We help our clients plan for future taxes and create a retirement income
plan to help minimize the taxes they will pay.
Everyone’s situation is different, and today’s tax and retirement environment is
extremely complex.
Should you have any questions or would like to discuss any of the topics introduced
above, please reach out to us!
Nikulski Financial, Inc
info@nikulskifinancial.com
(563) 344-0118
Sources & Disclosures
1 https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ https://www.barrons.com/articles/secure-act-
we-answered-the-most-commonly-asked-questions-about-the-retirement-bill-51576751402
2 https://taxfoundation.org/look-ahead-expiring-tax-provisions/
3 https://www.marketwatch.com/story/the-little-noticed-tax-change-that-could-affect-your-return-2018-03-19
https://www.taxpolicycenter.org/taxvox/hidden-tax-increase-big-six-tax-outline
4 https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/
5 https://www.aarp.org/money/taxes/info-2018/medical-deductions-irs-fd.html
6 https://www.marketwatch.com/story/secure-act-includes-one-critical-tax-change-that-will-send-estate-planners-
reeling-2019-12-30
7 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2019
https://www.irs.gov/pub/irs-prior/i1040tt--2017. pdf
8 https://www.marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-
03-26
9 https://www.marketwatch.com/story/do-i-have-to-pay-back-my-1200-stimulus-check-dont-fall-for-these-five-
myths-about-the-stimulus-pay-ments-2020-04-18
10 https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/irs-guidance-workers-payroll-tax-
holiday.aspx
11 https://www.savingforcollege.com/article/can-i-recontribute-a-refund-to-my-529-plan
12
https://www.consumerfinance.gov/about-us/blog/cares-act-early-retirement-withdrawal/
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