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Tax updates for investors

As tax consequences play into investment strategies Dave Sandstrom highlights recent federal developments to consider. From the 2019 Investment Outlook Seminar.

Dave Sandstrom: I’m going to spend a few minutes reviewing some current and pending legislation that has been receiving a lot of attention lately.

The first one I’m going to talk about is the Tax Cut and Jobs Act of 2017, more commonly referred to as the new tax law. And most of you experienced it this past April. Specifically, I’m going to talk about its impact on deducting charitable contributions. And then I’m going to finish up with something known as the SECURE Act, or Setting Every Community Up for Retirement Enhancement, and its potential impact on your IRAs.

As many of you are aware, the new tax law featured a doubling of the standard deduction. One of the attentions of the law was to simplify filing for individuals as well as the IRS. And on that front, it seems to have been pretty successful. Consider that it in 2017 20% of tax filers itemized their deductions, and just this last year, in 2018, that number dropped down to 8%.

As a result, many of you lost your deductibility of your charitable contributions, and the last thing that we want to see is that your giving declines as a result of that.

So, one solution is employing something called a donor-advised fund. Some of you are probably familiar with a tax strategy in which you alternate tax years between itemizing deductions and taking the standard deductions. Sometimes this is referred to as bunching. This is when you double up expenses in a given tax year with the goal of making your itemized deductions larger than the standard deduction. Common examples of expenses used for this are property taxes and, of course, charitable contributions.

Click here to view the presentation by Bob Landaas at the 2019 Investment Outlook Seminar. The seminar also featured Kyle Tetting, Paige Radke and Dave Sandstrom. Each has a separate Money Talk Video. Click here for the 2019 seminar playlist on YouTube.
Take the 2019 seminar quiz.

There can be a downside to this as it relates to your charitable contributions because a lot of you aren’t comfortable maybe with giving your charity of choice a double amount this year and then nothing the following year, or perhaps you want to maintain your flexibility from year-to-year, you’re changing charities and you just want to be able to make those decisions more timely.

So this is where the donor-advised fund comes into play. You can deposit multiple years of projected charitable contributions into the fund at one time. You can take that full deduction in the current tax year, and then over time you can distribute those funds as you see fit.

You can deposit cash into that account up to 60% of your adjusted gross income and appreciated assets up to 30% of your adjusted gross income.

Securities with large capital gains exposure are especially attractive in this situation because not only do you get to avoid capital gains taxes through the sale of that, you also get to deduct that from your adjusted gross income, lowering your tax rate.

Keep in mind, it’s important on this one, once you make that decision to put the money into a donor-advised fund, for obviously reasons, it’s irrevocable. Once you get that tax benefit, you cannot pull that money back for yourself.

The next one that come into play because of the new tax law is utilizing qualified charitable distributions or QCDs.

So, taxpayers that are currently 70½ taking required minimum distributions from their IRA, they can make a contribution of up to $100,000 per calendar year directly to the charity of their choice, and that full amount is then reduced on your adjusted gross income.

It could also have some further impacts on other itemized deductions that are tied to adjusted gross income, whether you’re itemizing or whether you’re just claiming the standard deduction.

It’s also important to note that if you’re going to do this, that money has to go directly from your IRA custodian to the charity of choice. If you take possession of those funds, that’s going to trigger a taxable event.

And while employing a DAF or executing a QCD in part of your RMD from your IRA might sound complex and confusing, I can assure you that both of these options are very simple to do, simple to execute, and there’s plenty of time in 2019 to still take advantage of these, if they’re appropriate for your personal situation. I’d ask that you ask your advisor for assistance to avoid any pitfalls.

Learn more
Retirement requirements: Distributions, a Money Talk Video with Dave Sandstrom
Retirement spending with heirs in mind, a Money Talk Video with Dave Sandstrom
Bigger Bang from charitable distributions, a Money Talk Video with Art Rothschild
What corporate tax cuts mean for investors, a Money Talk Video with Marc Amateis
When should I …take my required minimum distribution?
When should I …check my beneficiaries?

Finally, the Secure Act. As I mentioned earlier, this law is on the floor of Congress. It has broad bipartisan support at this point. It passed the house 417 to 3. And if it passes, it’s going to have some significant impacts on IRA rules.

Now, a large portion of this bill addresses corporate 401(k) plans as well. But for this audience today, I’m just going to touch on the IRA changes that will probably affect most of you in this room.

And, as with most new laws, there’s some good news and some bad news.

Start with the good news. IRA contributions will no longer have age limits. Current law restricts you to age 70½, regardless if you’re working or not. You can no longer make deductible IRA contributions. The new law would allow you to continue to make those deductible IRA contributions as long as you continue to work. I think as Americans live longer, we’re also working longer, and I think that part of the law change is a good idea.

Along similar lines, the age in which required minimum distributions are to occur would be changed from the current 70½ to age 72. So, this is a hard-start setup for the end of this current calendar year. Meaning, if you’re 70½ prior to or on 12/31/2019, you would be required to take your distributions at age 70½. If your 70½ birthday is on 1/1/2020 or beyond, then you get to extend that distribution until age 72.

I think my favorite part of this new law is the fact that I no longer have to figure out what your half birthday is. Once again, this is a testament to people living and working longer. I think it’s a positive.

Both of those changes, however, are allowing you as the taxpayer to defer income further into the future and even additional income. So as this always works, the government has to figure out a way to pay for that. And the big change here is that non-spousal beneficiaries of IRAs will no longer be able to stretch those distributions out over their life expectancy. Instead, you’re only going to have 10 years to liquidate those accounts.

This is going to have a pretty substantial impact on young beneficiaries of large IRAs. Consider for a moment a 40-year-old beneficiary who’s getting a $1 million IRA. Under current law, they could stretch those distributions out 40 or 50 years over their lifetime. Now imagine that they have to take out $100,000 a year for the next 10 years. During their prime earning years, this could have a substantially negative impact on their tax rates.

Keep in mind that this is still on the floor of the Senate. The Senate could certainly make some changes, but I think this is something that we all need to pay attention to, as the end of the year is coming up rather quickly.

Dave Sandstrom is vice president and an investment advisor at Landaas & Company.
Money Talk Video by Peter May and Jason Scuglik

(initially posted Oct. 14, 2019)

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