Plan to come out of the pandemic financially sound

Paige Curtiss

While it’s easy to get wrapped up in the day-to-day stress the coronavirus pandemic has created, you’ll thank yourself in the future if you take a step back and take advantage of planning opportunities to maximize your future cash flows and investment returns. 

Here are some ways to benefit from the economic environment and tax legislation that’s resulted from COVID-19:

Consider converting a traditional Individual Retirement Account to a Roth IRA. Because of the pandemic, your income could be lower in 2020, resulting in a lower tax rate. Roth conversions require the amount converted to be recognized as taxable income in the year of the conversion. Doing this conversion in 2020 would allow you to take advantage of your lower income tax rate. The Tax Cuts and Jobs Act of 2017 (TCJA) lowered the tax rates, but future legislation could increase rates to help recover from the economic effects of COVID-19. Why convert your traditional IRA to a Roth? Doing so is advantageous because future tax rates will likely be higher. Taxing the balance of your IRA now will lead to savings in the future, because Roth distributions are
tax-free as long as the account has been open five years and you’re 59 ½ or older. Unlike traditional IRAs, Roths aren’t subject to required minimum distributions. The money in a Roth can grow untouched for as long as needed.

The Coronavirus Aid, Relief and Economic Security (CARES) Act allows distributions up to $100,000 from retirement plans for qualifying purposes related to the pandemic — the adverse financial consequences of being quarantined, furloughed or laid off or having work hours reduced. This amount isn’t subject to the 10 percent early withdrawal penalty. It’s also allowed over a three-year spread, which means you could report a third of the distribution on your federal tax return for the next three years. You also could repay the distribution within three years, in which case the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer  not subject to federal income tax liability.

Keep the new net operating loss (NOL) rules in mind if you find yourself or your business at a tax loss in 2020. The CARES Act removed the 80 percent limit on NOL utilization the TCJA imposed for tax years beginning before 2021. Additionally, any NOL generated in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 are allowed a five-year carryback period. It likely could be beneficial to carry back any NOL that occurs during this time because tax rates were higher five years ago than they are now and your income could have been higher five years ago than it will be in future years.

Don’t let the performance of your investment portfolio surprise you when tax time comes. Review your situation before the end of the year to minimize any capital gains tax you might owe as a result of buying low during the worst of the pandemic and selling high as the market recovered. If you have capital gains, consider selling nonperforming stocks at a loss to prevent paying taxes on net capital gains. If you have capital losses, see if you have any stock you can sell at a gain. This is a smart move because capital losses are fully deductible to the extent of your capital gains. However, capital losses in excess of capital gains can offset only $3,000 of ordinary income. The remaining capital losses carry forward indefinitely.

Members of our community need assistance during this difficult time. If you’re considering charitable contributions to qualified organizations, your tax liability will benefit more than ever. Taxpayers who don’t itemize will receive up to a $300 above-the-line deduction for charitable contributions made in 2020. If you itemize, the normal 60 percent of adjusted gross income limitation on charitable contributions has been increased to 100 percent of AGI.

These are just a few of the planning opportunities available to help you come out of the pandemic as financially sound as possible. Talk with your certified public accountant or advisor to ensure you’re aware of the options that could be tailored to your needs.