Tax Planning

Your monetary future: there’s nonetheless time for tax planning 2021 | Corporations

The time for tax planning for 2021 is running out.

Many people complain about their income tax due but take little or no action to reduce this amount. A better way is to be proactive and take action.

When we talk about tax planning, it’s from a longer term perspective than just this tax year. Some of the actions you will take this year, such as: B. a Roth conversion could increase this year’s bill, but result in large future savings.

Most of the possible actions must be completed by December 31st, leaving about eight weeks to get everything done. Many custodians and other financial institutions operate on emergency staff during the holidays and post delays can occur so these facts need to be taken into account when setting a schedule.

First, let’s talk about possible Roth conversions. A Roth is similar to the old Fram oil filter commercial: “You can pay me now or you can pay me later.” In the advertisement, the reference was that you need to keep your engine oil clean or replace the car engine.

With a Roth conversion, you choose to pay the income tax that you deferred on the IRA deposit now instead of later. There are several reasons you can choose to do this.

First of all, you think that tax rates will go up in the future. Why not pay if they are lower? Maybe you want future growth in this Roth to be tax-free instead of tax-free, or you may have a large amount of qualified money in a 401k and are delaying social security enrollment to manage your tax burden.

You may have had a year with less than normal income, or you may have leeway to increase the staple. After the death of the first spouse, converting qualified money could make a world of difference now rather than later. At this point, you are getting half of the free cash from personal exemptions and the tax brackets are roughly half that. This can make a huge difference in taxes.

Conversion can help reduce your taxable estate in the event of death. If your children or other beneficiaries are in the highest income years, conversion allows you to pay the tax at a lower rate that they would have to do.

Some of the tax changes currently being discussed in Washington, DC could cut in half the amount of estate you can give to heirs without incurring federal estate tax. This lower limit would affect many more families. There is also discussion about possibly phasing out the Roth conversion for some taxpayers and ending such strategies as a backdoor Roth. Although these changes have not yet been anchored in law, they are still being discussed.

One important thing that many people fail to realize is that an inherited IRA that goes to your children cannot be turned into a Roth by them. It has to stay as qualified money until they pay taxes on it. Due to the Secure Act, which came into effect on January 1, 2020, you must liquidate your inherited IRA by the end of the 10th year after your death. This rule does not apply to your spouse and some other restricted groups. This could force the beneficiaries to distribute them during the peak income years.

We’ll look at more tax planning options in a future column. Be proactive and keep lifetime taxes as low as legally possible. Don’t miss the opportunity to do something before December 31st.

Your Financial Future was written by certified financial planner Gary W. Boatman, MBA and CFP, who also authored the book Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility. If there’s an area you’d like to see covered in the column, send your suggestions to

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