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A Guide to the Hidden Opportunities in Your Tax Return

The Tax Cut and Jobs Act (TCJA), passed at the end of 2017, and SECURE (Setting Every Community Up for Retirement Enhancement) Act, passed at the end of 2019, radically changed your tax picture.1 Most Americans are going to pay less in taxes under the new tax brackets and a few are going to use this great opportunity to permanently lower the taxes they pay. The COVID-19 pandemic and relief acts also spurred new tax wrinkles you should know about. I want to emphasize that this is a limited opportunity to leverage current laws. The 2017 rules are scheduled to expire in 2025 (if they don’t disappear sooner under the new administration), and most taxpayers will see a tax hike.2 However, this sneaky IRS move means you’ll probably pay more in taxes even before they expire.

To reduce the impact of the new tax laws on government revenue, the IRS changed how it increases things like thresholds, deductions, and credits for inflation.3 It sounds like a minor procedural move, but it’s actually a big deal. In plain English, this change means that many taxpayers will “creep” into higher tax brackets as their incomes grow because the tax brackets themselves won’t increase as much as they used to for inflation.

Bottom line: many taxpayers will pay more in taxes over the next few years due to this hidden tax increase. It might be only a few hundred dollars every year, but over time, even small tax increases add up! Unless you take steps now to reduce your taxable income. The current tax rates might be the lowest you’ll see for the rest of your life, and I want you to make the most of them. All 6 opportunities in this guide are actions you can take right now to potentially lower your taxes this year and in the years to come. I strongly recommend that you take this list, along with your tax return, to your CPA and financial professional to see which tax reduction opportunities have opened up for you.

1. Take the Standard Deduction Later

The new tax rules nearly doubled the standard deduction and did away with many write-offs, removing the tax benefit of itemizing deductions for most taxpayers.4 However, an old accounting trick means you can still optimize your deductions under the new rules by “bunching” itemized deductions in a single year to get over the standard deduction threshold and then taking the standard deduction the following year—potentially maximizing your tax savings multiple years in a row. For example, if your property taxes for 2022 are assessed in 2021, you can pay them in 2021 and take the deduction in 2021. Or you can make several years of charitable contributions in 2021 instead of making your usual annual contributions.

2. Pre-Pay Your Medical Expenses

Have major medical-related expenses come up? You can potentially maximize the tax deduction by prepaying your out-of-pocket medical expenses for the year to get above the standard deduction amount and meet the 7.5% AGI threshold (and maybe even get a discount for paying upfront). What kind of medical expenses qualify? A surprising number, including unreimbursed doctor fees, long-term care premiums, certain Medicare plans, and some home modifications.

3. Give Money to Your Favorite Charity Right from Your IRA (New SECURE Act Opportunity)

Even though the SECURE Act changed the age at which your RMDs must start from 70½ to 72, you still have the right to make Qualified Charitable Distributions directly from your IRA to a qualifying charity, once you’re 70½, allowing you to exclude up to $100,000 from your gross income, (with certain restrictions).

4. Lower Your Taxable Income with a Roth Conversion (But Do-Overs Are Done)

A Roth conversion is a great way to permanently lower your taxable income in retirement by converting tax-deferred assets into tax-free assets and paying taxes on the conversion in an optimal tax year (like under today’s favorable tax brackets or if your retirement assets lost value this year). For example, if you’re a married couple filing jointly and your household earned $250,000 in 2020, your effective tax rate is about 16.9%, while it was 23.09% under the old rules.7 Unless you expect your taxes to be lower in future years, now may be an ideal opportunity for a Roth conversion. Under the old rules, you could choose to reverse a Roth conversion (called recharacterization) and eliminate the tax bill. That loophole is gone, meaning once you convert that Traditional IRA to a Roth, you don’t get a do-over.8 So you really have to look at all the variables and pick the right time for the move. We can review your options together and choose the optimal strategy for you.

5. Review How You’re Paying Your Investment Fees

Prior to the TCJA, you could write off some of the fees you pay for investment management. The TCJA did away with that deduction, but there are still ways to pay fees with pre-tax dollars if they make sense in light of your overall financial goals and investment performance.9 That's why we run the numbers with clients to potentially maximize the after-tax return on their investments—not just the market return.

6. Optimize Your Retirement Contributions

The TCJA and SECURE Act introduced many changes to tax rules. The 2020 CARES Act also temporarily changed certain tax requirements, making tax planning even more critical this year. The most important step you can take right now to reduce your taxes this year may be to review how and where you’re making retirement contributions. Why? Because you may be missing out on critical tax savings (and investment growth) if you’re not optimizing your contributions. Depending on how close you are to retirement and your overall financial picture, you might be better off splitting contributions between retirement accounts or even diverting your contributions elsewhere to reduce debt (such as mortgage interest that is no longer deductible if you claim the standard deduction). We can run the numbers together if you'd like a professional opinion.

Special COVID-19 Considerations That Could Affect You

ECONOMIC STIMULUS CHECK If you didn’t get a check from the IRS yet and think you’re owed, don't worry. Since it’s technically an advance refund of a 2020 tax credit, if eligible, you’ll receive it after filing your 2020 taxes. Important! You do not owe income taxes on your stimulus payment, nor must you pay it back.10 WORKING REMOTELY If you left your home state and worked remotely in another during 2020, you could owe taxes to the second state. Each state has different tax reporting requirements for remote workers, so it's critical to gather records and file them accurately.

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