Finance Q&A

Financial Q&A

Protecting your investment portfolio

Q IFinancial Q&A

Q: I am concerned about the tax talk coming out of Washington. I read that if passed, my tax liability will increase. What can I do before the end of the year to cut my income and save my heirs potential estate taxes? A: While the proposed tax changes are indeed scary, the final version of the law will be somewhat different than what is being discussed. To address your income concerns, it is best to be proactive, so consider the following tax planning strategies.

• Contribute to your retirement plan. The IRS is your silent savings partner since the contribution is tax deductible. Making the maximum allowed contribution helps to optimize the income deduction benefit. • Maximize itemized deductions with donations to charity. You can make significant charitable contributions that will lower your adjusted gross income, but you must itemize not take the standard deduction on your tax return. • Sell stocks that have declined. You can reduce income up to 3,000 from the loss. If you still believe in the stock you sold, you must wait 31 days before you buy it again (wash sale rule). • While the general rule is to defer income to the next year to avoid a larger tax bill, that may not be the case in 2021. The proposed tax legislation will most likely increase income tax rates for high-income earners, so it could make sense to accelerate or not defer income for this tax year. • Consider a Health Savings Account (HSA). If you participate in a high deductible health insurance plan, you can make tax deductible contributions to this type of account and use the funds to pay for qualified medical expenses (coinsurance, copayments, dental work, vision care, chiropractic visits, prescriptions, and more).

Account funds grow tax free; funds are not subject to forfeiture at year end, and the account can be passed to a beneficiary at death.

Estate taxes are here to stay. Even if the tax legislation fails, the estate exemption is scheduled to be reduced by approximately 50% to 5.3 million per person in 2026 (indexed for inflation). These basic estate planning strategies could prove valuable. • Transfer your life insurance policies to an irrevocable life insurance trust. You must live 3 years from the date of the transfer for the proceeds to be excluded from your estate. Additional insurance you purchase and owned by the trust is excluded from your estate and is exempt from the 3-year rule. • Take advantage of the annual gift tax exclusion. You can gift $15,000 to anyone and it avoids gift tax. • Make unlimited payments directly to medical providers or educational institutions on behalf of another without incurring a taxable gift or affecting your annual gift exclusion. • Consider using the lifetime gift and estate tax exemption during your life. Currently, individuals have an $11.7 million (double that amount for a couple) tax exemption. Gifting up to that limit during your life means no out-of-pocket gift tax and it decreases the size of your taxable estate.

The new tax law will substantially reduce this amount, so if you are financially able to make a large gift, this calendar year would be ideal.

I would recommend a review of your goals and objectives with your team of advisors before making any moves. Tax planning is especially challenging when you aren’t sure what changes are possibly coming over the next few months.

William B. Howard, Jr., ChFC, CFP

International Place II 6410 Poplar Ave., Suite 330 Memphis, TN 38119 Telephone: (901) 761-5068 Fax: (901) 761-2217 whoward@whcfa.com

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