Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Services
 

On Tuesday March 17, Treasury Secretary Steven Mnuchin announced that individuals and corporations can delay their tax payments for 90 days, until July 15, 2020, due to the coronavirus pandemic. Subsequently, the IRS issued Notice 2020-17 providing additional details regarding the 90 day payment deferral.

Individuals can defer up to $1 million (the Applicable Postponed Payment Amount) in payments until July 15, 2020 regardless of filing status. For example, the postponed payment amount is the same $1 million for a single individual as it is for married couples filing a jointly. The deferral covers taxes due on income received by individuals from pass-through entities, including S corporations and partnerships. It also covers payment of tax on self-employment income. Corporations can defer up to $10 million in payments for each consolidated group or each corporation that does not file a consolidated return. During the deferral, the IRS will not charge interest or penalties, essentially providing taxpayers an interest-free loan. Mnuchin’s March 17th announcement did not delay the April 15th filing deadline.

IRS Notice 2020-17 adds that the deferral period also applies to April 15th first quarter 2020 estimated tax payments. A few states, including California, Connecticut, and Maryland, have announced that they are extending deadlines to file certain state tax returns, but it is currently unclear how Illinois and other states will conform to the federal announcement.

To say these are uncertain times is an understatement, but market volatility can also provide a number of tax planning opportunities. Stocks are currently trading significantly below all-time highs, which is a good time to consider the following tax focused strategies:

  1. Eliminate tax-inefficient mutual fund holdings, and consider a move into ETFs or tax-efficient funds. Mutual funds often distribute large capital gain distributions even during down years, but taxpayers have chosen not to sell their holdings due to large unrealized gain positions. Consider recognizing losses while also selling mutual funds with gains and reinvesting the proceeds in a more tax-efficient security. You benefit by resetting your tax basis and eliminating mutual fund capital gain distributions.
     
  2. Harvest stock losses. Today’s depressed markets provide the opportunity to sell losers, reinvest, and benefit from strong economic returns while creating tax losses to offset future gains. Be aware of the wash sale rules, which prevent you from purchasing “substantially identical stock or securities” within 30 days before or after the sale of the loss position. Avoid the wash sale rules by purchasing securities that have the same investment return profile as your current holdings.
     
  3. Convert your Traditional, Rollover, or SEP-IRA to a Roth IRA. The general Roth conversion rule is to convert and pay tax today if you expect your retirement top marginal tax rate to be higher than your current one. Today’s depressed market prices however provide a one-time opportunity to convert when the value is extremely low, reducing the strategy’s tax cost. Note that you pay tax on the conversion date value regardless of future price changes; you benefit with large future price increases. Be warned, that under post-2018 tax rules you can no longer undo the Roth conversion if stock prices drop further.
     
  4. Front-load your 529 plan contributions to capture future market upside. The gift-tax rules allow you to fund five years of 529 contributions up-front without using your lifetime gift exemption. Each spouse can contribute up to $75,000 per child into a 529 plan today. If you are bullish on the market and have a long-term horizon, today’s depressed values provide a unique opportunity to maximize your 529 plans.
     
  5. Gifting when portfolio values are low. Taxpayers have a unique window of opportunity between now and January 1, 2026 for gift giving. Prior to January 1, 2018, the law provided for a lifetime exclusion from taxable gifts of $5 million per individual or $10 million per married couple, which is indexed for inflation after 2011. However, from 2018 through 2025, taxpayers are allowed to double those gifts tax-free, or $11.18 million for 2018, $11.4 million in 2019 and $11.58 million for 2020 as indexed for inflation. On January 1, 2026 this exclusion benefit sunsets and goes back to pre-2018 law, which is $5 million per person indexed for inflation. Any gifts made now are safe and tax-free, however. Thus we have a five-year window of opportunity to essentially double our tax-free gifts. On top of this gifting opportunity, as investment portfolios fall, investors should take advantage of this gifting shares at the current depressed values. When these investments recover in the future, the benefit will have been passed on to the recipient of the gift. The IRS has stated in a 2018 ruling that there will be no claw-back of the temporary gift exemption benefit.
     
  6. Use a Health Savings Account as an investment account. HSAs are turbo-charged investment vehicles and a great investment in a down market. Much more than just a simple savings tool for medical emergencies, they double as a long-term care insurance policy as well. Those with high-deductible health insurance plans can contribute up to $3,550 for individuals and up to $7,100 for families in 2020. Those over age 55 can contribute an additional $1,000 per year. HSAs can be much better savings vehicles for retirement than IRAs, as they provide a triple tax benefit: (1) you can contribute to them by setting aside pretax earnings without paying federal or state income tax, (2) that money can be invested and grows tax-free, and (3) if used for medical expenses, you can withdraw this money tax-free before retirement, which you cannot do with a 401(k) or an individual retirement account. A spouse can continue to use the funds without any income tax liability for medical-related expenses, continuing the long-term care insurance character of the account. Finally, in Notice 2020-15, in response to the current pandemic health crisis, the IRS said that health plans that otherwise qualify as high-deductible health plans can pay for coronavirus-related testing and treatment without jeopardizing their HSA tax-deductible contribution status.
     
  7. Mortgage Refinancing. For those that can itemize their tax deductions, mortgage interest remains one of the last tax deductions currently available. Homeowners can deduct interest expenses on up to $750,000 of mortgage debt and can claim the deduction for both a primary and second home, up to the cap. Current low interest rates on 30-year loans of less than 3% provide taxpayers the unique opportunity to buy a new home or refinance an existing home mortgage and lock in at a historically low rate with interest that is tax-deductible as an additional benefit.

Finally, the IRS has also created a new website specifically regarding the coronavirus’ effect on taxpayers. The site links to various online resources, and has information about the Free File program, refunds, payment plans and assistance for those who are low-income, elderly or disabled.