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DiMeo Schneider & Associates

In Focus: Leveraging Tax Savings & Other Planning Opportunities

Investment Manager Research | Financial Planning | COVID-19 April 8, 2020

Given the precipitous drop in equity markets over the past two months, many investors may find themselves preoccupied with continuous coverage of the coronavirus and the resulting impact on markets and the economy. However, individuals should not lose sight of significant planning opportunities – some of which are tied to recent market volatility.

Tax Loss Harvesting
With global equities having declined 20 percent in the first quarter, investors may now have positions in taxable accounts with unrealized losses. In such instances, an investor should consider harvesting the loss while replacing the exposure with a similar, but not identical, security. In doing so, a realized loss is produced for tax purposes while the portfolio is still positioned to benefit from a subsequent market rebound.

Realized losses can offset realized gains. To the extent realized losses exceed realized gains in a given tax year, up to $3,000 of losses can be applied against ordinary income with any excess producing a loss carryforward to be used in future tax years. Investors should be aware of the “wash sale rule” which states a loss cannot be realized for tax purposes if a substantially identical position was bought within 30 days before or after the sale.

Roth Conversions
Individuals with significant Traditional IRA or 401(k) assets may consider converting to a Roth IRA, as the market selloff has reduced IRA and 401(k) balances. Roth IRAs have very favorable tax treatment as the account grows tax-deferred, qualified distributions are tax-free and there are no required minimum distributions for the original account owner.

Individuals should recognize that converting a Traditional IRA or 401(k) to a Roth IRA is a taxable event (taxed at ordinary income rates) thus, there are numerous variables to consider:

Roth Conversion Tax Considerations

Reducing Concentrated Stock Positions/Portfolio Rebalancing
For investors with highly appreciated single-stock positions, the recent market pullback may provide an opportunity to pare back such exposure at a reduced tax cost (lower capital gains taxes). The same can be said for portfolio rebalancing as portfolios with a sizable overweight to, say, U.S. large cap stocks may be able to redeploy a portion of the exposure to other asset classes at a lower tax cost.

Charitable Giving
Ordinarily, an investor with long-term appreciated securities would be better served by gifting such securities rather than cash. However, this general guideline changes a bit given 1) the extent of the recent market decline (stocks were more valuable as of late 2019) and 2) tax changes associated with the recently passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

The CARES Act included a provision removing the adjusted gross income (AGI) limitation for cash contributions made in 2020 to public charities (private foundations, supporting organizations and donor-advised funds are excluded). As such, taxpayers can elect to deduct up to 100 percent of adjusted gross income after factoring in other charitable contributions otherwise subject to AGI limitations. In comparison, the charitable deduction for long-term appreciated securities is limited to 30 percent of AGI for gifts to public charities and 20 percent of AGI for gifts to private foundations. As a result, some taxpayers may find a greater tax benefit in making 2020 charitable gifts through cash rather than securities.

Taxpayers may also consider a “bunching” strategy in which several years’ worth of charitable gifts are made in a single tax year to produce a large itemized deduction total, while the standard deduction, which is greatly increased following the Tax Cuts and Jobs Act of 2017, is claimed in subsequent years.

Required Minimum Distributions (RMDs)
The SECURE Act of 2019 pushed back the beginning age for required minimum distributions to the year in which an individual turns age 72 (previously age 70½) or by April 1 of the following year. The CARES Act suspended RMDs for calendar year 2020 (except for qualified defined benefit plans), as such, individuals with sufficient assets for living expenses should consider forgoing distributions from retirement accounts that would otherwise be taxable.

Basic Estate Planning
The federal estate exemption stands at $11.58 million per person for 2020 but is set to revert to a base level of $5 million, plus inflation adjustments, in 2026. Last November, the IRS issued final regulations clarifying taxpayers who took advantage of the increased exemption amount (tied to the Tax Cuts and Jobs Act) would not be subject to a future ‘clawback’ should the exemption decrease. Per the IRS news release, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”

The possibility exists that the exemption amount could change prior to 2026, as Democratic presidential candidates have expressed a desire to modify current estate tax provisions. Individuals likely to have a taxable estate may consider accelerating gifts given the elevated exemption amount and currently depressed asset values.

Advanced Estate Planning
Given the low interest rate environment, high net worth individuals may be able to take advantage of certain estate planning strategies.

For example, a grantor-retained annuity trust (GRAT) allows for the transfer of assets which grow above the statutory IRS rate at a discounted gift and estate tax cost. The IRS Section 7520 rate stands at a meager 1.2 percent for April, assets placed in a newly formed GRAT which grow above that rate over the trust’s term will ultimately transfer to the trust’s designated beneficiaries, thus representing a potentially significant estate planning opportunity.

As another example, properly structured intra-family loans can take advantage of low interest rates. In April, the applicable federal rate (AFR) for a mid-term loan (more than three years, but less than nine years) stood at just 0.99 percent.


The information contained herein is confidential and may not be disseminated or distributed to any other person without the prior approval of DiMeo Schneider. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent future expectations and actual returns, volatilities and correlations will differ from forecasts. This report does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Past performance does not indicate future performance and there is a possibility of a loss.

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