Leading tax topics on the minds of financial advisors

Leading tax topics on the minds of financial advisors

SECURE Act regulations, the 10-year rule, Roth IRA strategies, and the future of the SALT deduction were among the top questions from financial advisors at our recent webcast.

In the advisor-only webcast, “Ideas to engage clients during tax season,” we presented an update on potential legislation being discussed on Capitol Hill, including an outlook for the SALT deduction, and key planning ideas for this tax season.

While changes to the SALT limits may not be likely, Congress may act later this year on other tax provisions and bipartisan retirement legislation, SECURE 2.0. In addition, the IRS recently proposed new rules to clarify the provisions of the original SECURE Act, including regulations for inherited retirement accounts.

The Roth IRA, at the core of several tax planning strategies, also generated many questions.

For this tax season, advisors may want to consider discussing a variety of tax-smart planning ideas with taxpayers to try to mitigate future tax liability. Explore these ideas in “10 income and estate tax planning ideas for 2022.”

Tax planning ideas to consider

1. Roth IRA conversions as a tax strategy

A thoughtful strategy utilizing Roth conversions can be an effective way to hedge against the threat of higher taxes in the future. In fact, tax rates are scheduled to increase after 2025, when most of the current tax law provisions expire. Lower tax rates now translate to a lower cost for converting traditional IRA assets to a Roth IRA. It is virtually impossible to predict tax rates in the future, given uncertainty in Congress, or to have a good idea of what your personal tax circumstances will look like years from now. Like all income from retirement accounts, Roth income is not subject to the 3.8% surtax and is also not included in the calculation for the $200,000 income threshold ($250,000 for couples) to determine if the surtax applies. IRA owners considering a conversion to a Roth IRA should carefully evaluate that transaction since the option to recharacterize, or undo, a Roth IRA conversion is no longer available.

2. Alternative ways to fund Roth accounts

Taxpayers at higher income levels are prohibited from contributing directly to Roth IRAs. For 2022, income phaseouts begin at $129,000 ($204,000 for married couples filing a joint return). Taxpayers may want to consider funding a non-deductible (i.e., after-tax) IRA and then subsequently converting to a Roth IRA. There are no income restrictions on Roth IRA conversions. However, adverse tax consequences, referred to as the “pro rata” rule, may apply if the individual owns other pretax IRAs (including SEP-IRA or SIMPLE-IRA). Before considering this strategy, taxpayers should consult with their tax professional. Also, participants in 401(k) plans may be able to make voluntary after-tax contributions into their plan in excess of their salary deferral limit ($20,500 or $27,000 if age 50 or older). When allowed by the plan, after-tax contributions may be directly transferred to a Roth IRA without any income tax consequences upon a plan triggering event.* This may be a strategy for higher-income taxpayers to diversify their tax liability in retirement. While lawmakers have proposed eliminating the conversion of after-tax retirement assets to a Roth, legislation has stalled in Congress.

3. Maximizing deductions in years when itemizing

With the large increase in the standard deduction under recent tax law changes, and the scaleback of many popular deductions, fewer taxpayers will choose to itemize on their tax return going forward. Some taxpayers may benefit by alternating between claiming the standard deduction some years and itemizing deductions other years. If possible, it would make sense to “lump” as many deductions into those years when itemizing. For example, taxpayers may want to consider making a substantial charitable contribution during a tax year when itemizing instead of making regular, annual gifts. In addition, with the repeal of the “Pease rule,” there are no phaseouts on itemized deductions at higher income levels.

4. Expanding use of 529 accounts for education savings

529 college savings plans retain existing tax advantages. Account earnings are free of federal income tax, and a special gift tax exclusion allows account owners to elect to treat up to $80,000 in contributions as though those contributions had been made ratably over a five-year period. Qualified education expenses were expanded in recent years to include laptops, computers, and related technology. Recent changes allow families to use up to $10,000 annually for K–12 tuition and to payback student loans (up to $10,000 in total). Make sure to consult with a tax professional if considering a distribution for K–12 expenses since there may be adverse state income tax consequences.

5. The charitable rollover option for retirees

Retired IRA owners (age 70½ and older) may benefit from directing charitable gifts tax free from their IRA. Since even more retirees will claim the higher standard deduction, they will not benefit tax-wise from making those charitable gifts unless they itemize deductions. Account owners are limited to donating $100,000 annually, which can include the required minimum distribution (RMD), and the proceeds must be sent directly to a qualified charity.

6. Maximizing the 20% deduction for qualified business income (QBI)

The Tax Cuts and Jobs Act (TCJA) introduced a new provision (Section 199A) that allows certain taxpayers to generally deduct 20% of qualified business income on their tax return. Business income from pass-through entities such as sole proprietorships, partnerships, LLCs, and S Corps may qualify for this new deduction. Certain types of businesses — defined as a specified service trade or business (SSTB) — may be limited from taking the deduction based on the taxpayer’s household taxable income. The deduction is subject to a phaseout for SSTBs once income exceeds $170,050 ($340,100 for married couples filing a joint return). SSTBs include businesses performing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and certain brokerage services. Business owners impacted by the income phaseout may want to consider strategies to reduce taxable income such as funding retirement accounts, deferring income, or accelerating business expenses.

Action needed

Most of the tax provisions introduced by the TCJA are set to expire in 2025. Accordingly, taxpayers may want to consider making changes today to their overall tax planning. The tax landscape will shift in the future, unless Congress takes action. Taxpayers should discuss these ideas with a financial advisor and should not wait until 2025, as some strategies may not be available.

Financial professionals: If you missed our recent webcast, watch the replay and hear the latest update on federal legislation and policy proposals, and leading tax topics and planning strategies that clients may want to consider in 2022.

watch the replay


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