When tax refunds can hurt clients more than help: Tax Strategy Scan

Thanks to the higher estate tax exemption under the new tax law, advisors are revisiting an old strategy called upstream planning to enable their clients to save capital gains taxes on highly appreciated assets, according to this article on Barron’s.
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Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

Here’s when tax refunds can hurt clients more than help
Receiving a tax refund could do more harm than good for clients if it results in smaller paychecks and reduces their ability to cover monthly bills, this article in NerdWallet suggests. Clients would gain more by investing their money instead of taking an interest-free refund. To avoid getting a sizeable refund, clients are advised to adjust their tax withholdings by filling out a W-4. “The other thing that would be somewhat helpful is if the employee actually consulted their HR department, who should be able to help them in that regard — or a tax or financial advisor that could help them figure that out,” according to a CPA.

Tax season is here! What you need to make it easy
As the 2020 tax season officially kicks off, taxpayers are advised to avoid procrastinating and start preparing their returns sooner than later, according to this article in CNBC. “If you prepare everything else early, you’ll get your return handled much faster,” a CPA says. “The earlier you can push it through, the better chance you will have for your return being smoothly prepared, versus ‘I’m sorry you have to go on extension because we don’t have the time to go through it.’”

10 tax breaks for clients over 50
Clients can expect a handful of tax breaks when they reach the age of 50, this article in Yahoo Finance addresses. These tax breaks include a bigger standard deduction, a higher tax-filing threshold, property tax breaks and a tax credit for the elderly and disabled. Older taxpayers, the article notes, can also receive additional deductions on retirement contributions, take qualified charitable distributions from their retirement accounts and owe no early withdrawal penalty.

Building tax-free income in retirement
Clients who want to improve their retirement security are advised to consider creating a source of tax-free income, according to this article in Forbes. This means taking advantage of the Roth feature of their 401(k)s or contributing to a Roth IRA. Another instrument to build a tax-free retirement income is to buy life insurance, which offers various benefits including tax deferral, ready access to cash and long-term care coverage.

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

Here's when the IRS can take your clients’ IRA tax deductions away
Clients saving for retirement could potentially lose the tax deduction on their IRA contributions if their income exceeds a certain threshold, according to this article in Motley Fool. For example, single taxpayers and spouses filing separately can expect their IRA tax deductions to be reduced if their 2019 income is between $64,000 and $74,000, with those with more than $74,000 in income losing the tax break altogether.

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Tax planning Retirement planning Tax forms Tax breaks IRS IRAs