With tax season in full swing, how much longer can taxpayers enjoy the tax benefits from the 2017 Tax Cuts and Jobs Act (TCJA) and the 2019 SECURE Act? Most of the provisions expire at the end of 2025, but Congress could make changes sooner, so it’s anyone's guess. Here are three strategies to consider.
One powerful way to lock in today's lower effective rate is to convert some of the money in a tax-deferred Traditional IRA to a Roth IRA this year. You will owe income tax on the entire amount you convert, which then grows tax-free for the rest of your life.
Two potential benefits for converting to a Roth in 2021
- Increase retirement funds with a lower tax rate on the conversion, at the same time bypassing probable future tax-rate creep that could result in higher taxes during retirement.
- Traditional IRA account balance decreases, which in turn potentially shrinks the required minimum distributions at age 72, keeping more money in your pocket.
Considerations before using this strategy
- You might be better off waiting until retirement if you expect a sizable drop in income at that time.
- Conversions are now permanent, so unlike previous years you cannot recharacterize.
Use an IRA for Charitable Gifts (over age 70 ½ only)
Although the required minimum distribution (RMD) age is now 72, taxpayers 70½ and older are still eligible to make a Qualified Charitable Distribution (QCD). Under current rules, up to $100,000 can be withdrawn from your Traditional IRA and sent directly to the qualified charity of your choice, with no tax consequences for you. If you have RMDs this year, you won't be taxed on the amount you donate.
Overcome the standard deduction limitations
Many taxpayers lost the ability to itemize deductions due to TCJA limitations on state and local tax deductions and the larger standard deduction. Fortunately, there are several ways you can accelerate expenses and/or deductions into this tax year to regain the benefit of itemized deductions.
- Stack charitable donations. Rather than granting your usual annual amount, make a larger contribution that covers several years. Or use a donor advised fund (charitable account) to time your deduction and gifts.
- Accelerate or prepay medical expenses before year-end. Your medical expenses must exceed 7.5% of your AGI to be deducted. Many expenses can be prepaid, including long-term care premiums, some home modifications and some Medicare plans.
- Pay certain taxes this year, for example, your property taxes. If your 2022 taxes are assessed in 2021, you can pay and deduct them in 2021. This is still limited to the $10,000 overall deduction limit on state and local taxes.
Please contact Mark Ziety, CFP®, AIF® at 608.442.3750 with any questions. Click here to learn more about tax strategy.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society
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