Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
As a result of the pandemic, state and federal deficits have risen to unprecedented levels, making it likely that taxes will increase in the coming years for wealthy individuals, particularly those who live in certain states with significant budget deficits.
President-elect Joe Biden campaigned to eliminate many of the tax cuts enacted by President Donald Trump’s administration and place higher taxes on the wealthy. The federal tax overhaul signed into law by Trump in 2017 reduced individual income tax brackets. The overhaul’s income tax provisions will expire in 2025 unless there is further legislation to make the cuts permanent, and the tax bill could be repealed sooner.
As we begin a new year, wealthy taxpayers should take the time now to prepare for the possibility of higher taxes. A multiyear tax planning approach is essential when considering how to combat future tax increases.
It is critical to know your effective and marginal tax rates when evaluating tax strategies that accelerate the reporting of income from one year to another. It is also essential to assess any unanticipated costs of accelerating income such as higher Medicare premiums resulting from the income shift since higher-income earners pay higher premiums for their plans.
One strategy that could benefit wealthy individuals is converting all or part of an individual retirement account to a Roth IRA. Conversions can take place in one year or over a series of years and should be considered in conjunction with a review of the tax implications of the conversion. Once funds are converted, today’s low tax rates are made permanent. Funds in the Roth grow income tax free and do not have required minimum distributions. When assessing this situation, remember that you will need to have the funds available to pay the taxes due to conversion when taxes are due the following April 15.
Roth conversions are most beneficial when the taxes paid come from resources outside of the dollars converted, the Roth account is not expected to be used for many years or at all and it is invested aggressively to allow the account to grow significantly.
The likely effect pushes nonspouse beneficiaries into a high tax bracket as they remove funds from the inherited IRA. To combat the change brought about by the Setting Every Community Up for Retirement Enhancement, or SECURE, Act, many wealthy individuals prefer to pay the tax on the conversion now to remove the future tax burden on their children.
For those age 70 1/2 or older who have high IRA balances, qualified charitable distributions, known as QCDs, are a preferred method of making charitable donations. This type of donation goes directly to the charity from your IRA. While you will not get a deduction for this donation, you do not have to pay the income tax on the distribution. QCDs are the most tax-efficient way to make charitable gifts because they reduce taxable IRA balances and offset required minimum distributions, commonly called RMDs. QCDs are limited to $100,000 per year for each IRA owner.
It is essential that you maintain records of QCD distributions. For donations of $250 or more, whether made from your IRA or personal funds, you must obtain, as well as keep in your records, written acknowledgment from the charity indicating the value and a description of what you gave. For example, if you give cash, the receipt should indicate so. If you give property, such as publicly traded stock, the receipt should indicate the name of the security, the number of shares and the fair market value. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift. If this is the case, you must provide a description and good-faith estimate of the value of those goods or services. The receipt of goods or services is nondeductible.
For contributions of noncash items, including publicly traded securities, you must complete Form 8283, Noncash Charitable Contributions, and attach it to your return. Except for publicly traded securities, if you claim a deduction for noncash property contributions worth $5,000 or more, you must attach a qualified appraisal for the noncash property.
For contributions made through payroll deductions, you may use a pledge card prepared by the charitable organization, along with a pay stub, or other employer-furnished documents that show the amount withheld and paid to a charitable organization.
The pandemic has prompted many people to shelter in states that may not be their home state. If you live and work in a different state, you may be required to file as a nonresident in the state where you are sheltering. Residency rules vary from state to state. If you spend more than a certain number of days in some states, you are considered a resident even if you were not living in the state for very long. It is important that you understand the residency requirements of the state in which you are sheltering.
Additionally, the pandemic and looming tax increases have caused high-earners to think more seriously about moving out of high-tax states. Some cash-strapped states may even hike taxes for wealthy individuals to help fill the growing pandemic-related budget holes. Even if the limit on state and local tax deductions is repealed, accountants say the wealthy who work from home in other states now realize how easy it would be to leave.
Strategic tax planning that focuses on a multiyear period is essential to determine if any strategy is appropriate since what may work for some may not work for you.