Tax-time Tips

Published: December 22, 2020

While it may seem like 2020 will never end, the end of the year is in fact, fast approaching. Now is a good time to review your tax strategies and long-term planning objectives. In addition to normal year-end items, there are a number of prospective tax changes that may lie ahead. While the probability and magnitude of potential change depends on the outcome of the senatorial runoffs in Georgia in January, this is a good time to talk to Klingenstein Fields Advisors and your tax advisor regarding any prospective moves you may want to implement. To help you prepare for this year end, here are seven tips to consider.  

Use your annual gift tax exclusion. The annual gift tax exclusion amount for 2020 provides for $15,000 per recipient, per giver. If you are married, you and your spouse can each give $15,000 to each person you choose. If you intend to pass on a legacy to your loved ones and do not need the funds for daily living, it is always beneficial to try to use your annual gift exclusion amount to the fullest extent possible.   

Take advantage of the current lifetime gift tax exemption. The current lifetime gift tax exemption amount is $11.58 MM ($23.16 MM for a married couple), which will expire in 2025 and revert to $5 MM ($10 MM for a married couple). The possibility exists that this amount could be reduced sooner. If that happens and you have not used up the full amount, you will lose the opportunity to do so.

Consider Grantor Retained Annuity Trusts (GRATs). If you have assets with significant appreciation potential, a GRAT may be appropriate. A GRAT, which is an irrevocable trust, pays an annuity over the term of the trust, and the amount of appreciation in excess of the annuity payments goes to your heirs free of federal estate taxes. The current IRS hurdle rate for payments remains historically low, making this an attractive opportunity to potentially transfer wealth while avoiding significant transfer taxes.

Look at a Roth IRA conversion. For those with traditional IRAs, now may be a good time to convert to a Roth IRA. If the top marginal tax rate increases in the future, you could benefit by converting this year. This conversion could take place at a lower tax rate, especially if you take required minimum distributions in the near future when the tax rate might be higher.

Be charitable. This year, there is a one-time opportunity, through the CARES Act, to donate up to 100% of your adjusted gross income. Keep in mind, while the normal contribution amount may be in securities or other assets, the amount above the normal limit must be made in cash and to a public charity.

Be strategic in timing income and expenses. If you have potential income or capital gains that you want to realize, taking them this year while tax rates appear low might prove beneficial. On the other hand, if you have potential capital losses or deductible expenses, waiting until taxes increase may help to lower your future tax bill. 

Be an intergenerational lender. This may be a good time to make a loan to your children at the IRS approved rate, which, even in the current low interest rate environment, is much lower than institutional lending rates. Your children can benefit, and you get your funds back in the end.   

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.