Annuity transactions that cause tax-paying headaches: Tax Strategy Scan

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Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

The ‘gotchas’ in annuity taxation
While income from an annuity is tax deferred, taxation on this financial product can be more complicated than what most clients think, writes a Forbes contributor. Among the misconceptions: companies sometimes assume they will be treated like individual taxpayers when buying an annuity to fund executive payouts; wealthy widows often purchase non-qualified variable annuities instead of mutual funds to defer income taxes on future investment gains; and business owners often spread out their capital gains tax by selling their business with an installment contract ahead of making a sale to a competitor. "Taxation depends on how the annuity is owned, and how distributions are made from the product," he writes. "And if these details are ignored, there are hidden gotchas that can result in radically different tax outcomes," according to the article.

"Taxation depends on how the annuity is owned, and how distributions are made from the product," according to the article from Forbes.
"Taxation depends on how the annuity is owned, and how distributions are made from the product," according to the article from Forbes.

10 tax breaks for the middle class
Middle-class taxpayers are advised to take advantage of various tax breaks to enhance their bottom line, according to this Kiplinger article. These tax breaks include a zero tax rate on capital gains for clients with taxable income not exceeding $39,375 this year, the earned income tax credit, the saver's tax credit and tax deduction for retirement account contributions. Middle-income households may also qualify for the child tax credit, the American opportunity credit and tax breaks for caring for children and dependents.

How to lower your clients’ tax bills
Clients who want to reduce their tax liability before the year ends are advised to consider selling losing securities to offset their taxable capital gains, according to this article in Money. They are advised to boost pretax contributions to their retirement accounts and convert some of their traditional IRA assets into a Roth IRA. Those who want to give to charity can bunch year's worth of donations to maximize the charitable tax break, while retirees who have to take an RMD from their retirement account have the option of donating the money directly to charity to avoid taxation on the withdrawal.

Key changes for your clients’ 2020 tax returns
Clients should expect major changes to their 2020 tax returns, according to this article in Motley Fool. For example, the IRS has issued the new 1040-SR tax form to make it easier for retirees to file their returns. Clients can save more in their retirement accounts, while divorced couples can no longer claim alimony deductions next year. Taxpayers can also see inflation-related adjustments, such as higher standard deductions and higher exemption from the AMT.

To help individuals and businesses prepare for filing season, Grant Thornton has released a collection of year-end tax tips.
December 17

Ways to avoid paying higher Medicare premiums
Seniors are advised to reduce their taxable income in retirement to avoid Medicare Parts B and D surcharges, according to this USA Today article. To lower their taxable income, they should start taking withdrawals from their traditional 401(k)s and IRAs early, as this strategy will minimize the RMD amounts. Clients should also maximize their HSA contributions, draw money from their after-tax Roth accounts and life insurance policy. Investing in tax-efficient mutual funds and opting for a home equity conversion mortgage are other strategies they can use to minimize their taxable income.

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Annuities Retirement planning Tax forms Tax deferments Tax returns Medicare