The 2020 Tax Holiday and What to Do About It
Did that long-awaited vacation you planned for 2020 get cancelled because of Covid-19? You’re not alone. Fortunately, you can send (some of) your taxes on vacation instead.
For this year only, required minimum distributions (RMDs) have been suspended, which might mean that your taxes will be lower. As we enter the fourth quarter, now is a good time to think about how to turn this tax holiday into an opportunity.
What Changed for 2020?
The CARES Act, passed in March of 2020, contained a key change to the rules around RMDs. It temporarily suspended most RMDs for 2020, and it affects IRAs, 401(k)s and other defined benefit plans, and inherited IRAs. Additionally, the SECURE Act from 2019 increased the RMD age from 70.5 up to 72. As a result, many people who would have originally taken an RMD in 2020 no longer have to take those withdrawals or recognize the income.
So Now What?
If you’re one of the lucky people affected by these tax changes, this is a great time to use this change to your advantage. Let’s consider a few options:
Option 1: Do nothing and enjoy a low-tax year. Sometimes, the best approach is the simplest one. This is especially true if you expect your future tax rates to be at a similar level or lower level than this year.
Option 2: Accelerate income this year, if you have the option. Assuming that the lack of RMDs this year will lead to lower income this year, it might make sense to recognize additional income and pay tax now at a lower rate than you would otherwise pay in the future. Here are a few ways to do that:
- Take IRA/401(k) distributions this year anyway.
- Convert IRA dollars to Roth IRA dollars.
- Exercise stock options.
- Elect to receive a year-end bonus in 2020 (rather than the following January).
- Consult your tax advisor and financial advisor for ideas specific to your situation.
Option 3: Postpone tax deductions. You can functionally increase your income by delaying tax deductions until next year. To accomplish that, you can:
Bunch your deductions into next year when income will be higher.
Schedule nonemergency medical visits next year.
Avoid prepaying property taxes due next year.
Postpone charitable gifts until next year.
- Minimize depreciation deductions.
- Delay deductions for bad debts.
- Consult your tax advisor and financial advisor for customized options that fit your needs.
Thanks to the CARES Act, 2020 presents a unique tax planning opportunity. Use this time to pay taxes more efficiently by either accelerating income, postponing deductions, or both. Check with your advisor before making any changes because your situation may include special circumstances that will affect this decision.
Somewhere down the road, you’ll plan your next vacation, and your smart approach to 2020 tax law will allow you to splurge a little when the time comes!
This WealthNotes Inform was written by Jake Martin, Client Advisor