Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

This can’t-miss end of year 2020 tax planning webinar covers last-minute action items to check off your list to legally pay less in taxes.

Pure Financial Advisors’ Joe Anderson, CFP® and Alan Clopine, CPA, hosts of the Your Money, Your Wealth® TV show, podcast, and radio show, explain how to use the latest tax legislation (the Tax Cuts and Jobs Act, the SECURE Act, and the CARES Act) to your advantage, how to reap the benefits of tax-loss harvesting and tax gain harvesting, and how to employ sophisticated, tax-efficient charitable giving strategies. In many cases you only have until December 31st to implement these tax strategies so don’t skip this one.

Following the presentation, Joe and Al answer questions on Coronavirus Related Distributions, stimulus checks, charitable donations from an IRA, required minimum distributions, the step-up in basis, Roth IRA conversion strategies, solo 401(k), pensions and earned income, capital gains vs. ordinary income, minimizing taxes on inherited assets, and more.

Schedule your Free Financial Assessment now!

Historical Marginal Income Tax Rates in the US

Potential Income Tax Changes: Joe Biden’s Tax Proposals
– Ordinary Income Tax Changes
– Biden’s Proposed Tax Rates
– Increasing Capital Gains Tax
– Capping Benefit of Itemized Deductions
– Imposing Social Security Payroll Tax
– No Step-Up in Basis
– Reduced Estate Tax Exemption
– Raising Corporate Income Tax Rates

CARES Act Provisions:
– Coronavirus-Related Distributions
– Required Minimum Distributions (RMDs) waived in 2020

SECURE Act Provisions:
– Stretch IRAs eliminated
– IRA age limits removed
– RMD age changed to age 72

The Tax Law Time Bomb Affecting Your Retirement
– Taxable Income Rates & Capital Gains Tax Rates
– Tax Diversification: how is your balance of tax-free, tax-deferred and taxable money?

Understanding the Roth IRA Conversion Strategy
– When Not to Do a Roth Conversion:
– Zero Capital Gain Rates
– 20% QBI Deduction
– Understanding Pro-Rata

Tax Planning Tips
– Tax Loss Harvesting
– Tax Gain Harvesting
– Backdoor Roth IRA Conversion Strategy
– Net Unrealized Appreciation (NUA)
– Charitable Gifting Strategies: Donor Advised Fund

Watch our previous webinar:

The Election & Your Money: Tax Planning and Investing Strategies for 2021



Andi: Please welcome your hosts for today’s webinar, Joe Anderson CFP® and Big Al Clopine CPA.

Joe: Alan, you look like you’re sitting like way down. You gotta work on your camera.

Al: How’s that?

Joe: There ya go. Oh, it’s better. You’re gettin’ a safari.

Al: I’m in the Africa room, Joe. Our two guest rooms are themed. One is African, one is beach. So we are visiting Africa today.

Joe: All right. Sounds good. Hey, a few things. I wish we had a lot more information to share with you today, but we really don’t. We did this webinar a couple of weeks- what was it- maybe right before the election, Al?

Al: Right.

Joe: And so we’re still kind of in limbo. We don’t know what’s potentially going to happen. So we could throw some ideas out on what to do. We thought maybe if we did this later on late in the year, that we would have a little bit more clarity. But who knows, Alan? Who knows what’s going to happen?

Al: Yeah, you are right about that. There’s still a lot of uncertainty, but at least Joe, we’ll go through what some of the- Joe Biden’s tax plan is. It’s not a proposal. It’s not law. It’s not a bill. You know, but at least some of what he was saying during the campaign trail that go how- how it might affect people’s taxes going forward.

Joe: You know, but let’s talk a little bit more about that, too, because right now, you know, the president doesn’t necessarily make the tax law, right? Congress does.

Al: That’s right.

Joe: And so he’s on a campaign trail talking about different taxes that will affect some people, won’t affect a lot of people. But then there has to be the House and the Senate needs to necessarily sign off on this. And it’s pretty close race within the Senate. And so now we’re at a runoff. There’s two seats left. So we’ll kind of see what happens there. If Republicans keep control, there probably won’t be a lot of tax changes, is what I’m reading. But I guess, you know, the future is the future. So we don’t really necessarily know what to say there.

Al: Yeah, and to make matters even tougher- so there are runoffs are January 5th. So after year-end. And as we know, almost all tax planning strategies have to happen during the calendar year. So it makes this year extra hard. But we will go over what some of the changes may be. And then I think Joe, I’ll spend a little time assessing the likelihood, just so people can make, you know, the best-informed decision they possibly can.

Joe: Yeah, and I think more importantly, too, is that, you know, why we do this is really to answer all of your questions. So you know if you guys have individual questions, most of you have the same questions. So but, you know, there’s usually a few of you that get in the chat and go bananas. So feel free, ask any question that you want as we go through this. Free-form is a lot easier for Al and I, versus going through a canned presentation, especially with the information that is totally unknown. So make our jobs a little bit easier today if you want, and then just throw some questions at us. We’re going to go probably 45 minutes today. I’ll give you as much information and ideas as we possibly can. And then we will get you out of here so you can still eat some lunch. So let’s kind of late start here. What’s new? Well, we just kind of talked about it. There was an election and we still basically I mean, some people really don’t know who won yet. Interesting year, 2020. It’s going to go down in the books is probably the worst in history. But what can we do? Right? Well, you can listen to us, hopefully not for too much longer, but my name again is Joe Anderson, and that’s Big All. But why is it right maybe to take a look at tax changes? Why do we feel that there could be some tax changes down the road? Is that well, we’re in a very low tax environment in the history of the tax code. So we’re at 37% top marginal rate. We’re at a 20% top capital gains rate. So there could be some changes in regards to top marginal rates and capital gains rate. And if I were to take a poll and Andi, if you want to throw that poll out there, where do you think taxes are going to go? I mean, Al and I believe that they’ll probably go up. It’s speculation, but let’s see what you all think.

Andi: OK, so there is a poll now on your screen. Do you think tax rates are going to go higher, lower, no change or you’re not sure? So type in your answer there. And I know some people actually like to actually type in their answer into chat rather than pressing the button. I’m going to close this up in about 5, 4, 3, 2. I’m gonna give it a couple extra seconds because there’s a delay between when I say it, when you hear it. And I’ll close this poll up now. So we are at 88- 86% of people believe that taxes are going to go higher, 10% aren’t sure. 3% believe there will be no change.

Joe: OK. So we had 0% lower. 86% higher, 3% no change, 10% not sure. So. I think we’re in the same boat with all of you that we believe that tax rates are going to go up. So there could be some planning opportunities depending on where you fall from an income perspective.

Andi: Terry says that “the tax rates are going to the moon.”

Joe: The moon. All right. So why are we doing this? Because a lot of you have some concerns in regards to taxes. And so we want to basically control what we can control. And some of the things that we’ve always talked about if you’ve ever joined us before in any of our learnings or educational workshops, is we want to control basically our discipline, first of all. Right. So when the markets get a little bit shaky, we want to stay in our seats and stay within the plan that we put together. You can also control your fees. How much are you actually paying for your investment strategy that you put together? But we feel that we can add tax efficiency. Right, anyone. We can’t control the markets. You can control your discipline. But it’s hard. We think the easiest thing to do is to control your taxes. So if you understand how the tax system works. You’re going to be that much more able to control one of the biggest things. You can also control your risk, as well. So here’s what we want to look at. I’ll turn this over to Big Al and then I’ll chime in when I want to, I guess. We’ll look at income tax changes potential. Again, nothing’s in law. Nothing’s been right- it was all a campaign trail proposals. So we’ll see kind of what happens. The CARES Act and the SECURE Act are actual bills. So there’s some things that you might want to still do before the end of the year. What we got- it’s the 9th today. So you still have time. You got about 3 weeks to look at some ideas that we have for you in regards to utilizing the CARES Act, the SECURE Act, some of you might have a tax time bomb looming. And then we’ll wrap it up, answering your questions. So first things first, Al. Let’s- let’s kind of dive in on some of the tax proposals that Joe Biden has.

Al: All right, Joe, thanks. So I think right off the bat, it’s very important to say that this is- this is more of a concept, right? This is a campaign concept. It’s probably not even to the point where it’s a proposal. But it certainly is not a bill. It certainly is not law. So we’ll have to see. But I will go over what he talked about during the campaign. So the first thing was potentially raising the ordinary income rates. And so in terms of the ordinary income tax changes, so the highest rate right now is 37%. And Biden is proposing that it goes up to 39.6%, which is what it was under Obama. And you can see some of these rates here. The- the current rates, they start at 10%. They go all the way to 37%. If we compare that to what’s going to happen in 2026 under current law, we go back to the rates during the Obama era, going back to that 39.6% and each of these brackets go up about 3%. in general. And then you can see Biden’s proposed rates. Basically, they’re the same as what we have right now, with the exception of the highest rate, 39.6%. But here’s the kicker, is that 39.6%, instead of starting at about $500,000 for single and $600,000 for married couple, it would start at $400,000. So, again, we don’t know if that’s going to happen or not, but that’s a possibility. The next one, Joe, is the capital gains tax. This is a very controversial one. This is where capital gains rates would go to ordinary income rates if your income is above $1,000,000. A lot of tax gurus think this is going to be very difficult to pass, but you should know it’s out there. So if you’ve got a big capital gain and you have high income and I’m talking about your total taxable income in excess of $1,000,000, and you have the ability to recognize some of those gains this year, you might want to do it. But like I say, a lot of experts think this one will be tougher to get through.

Joe: Talk about that, because I think there’s some confusion, too, when it comes to total income. So if you have total income over $1,000,000, then the capital gains rate turns to ordinary income. So the top capital gains rate today is 20%. But under Biden’s proposal is that 20% goes to 39.6% so basically doubles from 20% let’s call to 40%. But when it says total income, does the capital gain- so let’s say you sell a business, you sell a home or, you know, a lot of small business owners, let’s say, would want to sell a business. Is that capital gain that they would have, does- that’s included in total income- its not- if their ordinary income is higher than $1,000,000, that would be assessed to that. But in the- if they sold like a apartment building or they had a huge gain on a duplex or something like that, that would be included in total income, correct?

Al: Yeah, that’s right. So just to illustrate, let’s say, of $100,000 of income otherwise, and you’ve got $1,000,000 capital gain, right? So now you’re at $1,100,000. So the first $100,000 is taxed ordinary income rates, the next $900,000 of capital gains is taxed under current law, OK, which means some is taxed at 15%. Some is taxed at 20%. OK, then under the Biden proposal means that extra $100,000, over $1,000,000 would be taxed at ordinary income rates, which would be 39.6%. So it’s- it’s not like all or nothing. It’s just that the capital gain part that’s in excess of $1,000,000 would be taxed at a higher rate.

Joe: Another issue, too, when it comes to the capital gains rate is also the- the elimination, let’s say, of step-up in cost basis, because this is kind of a double whammy. Right? So what- what a step-up in cost basis is, is that if I were to pass away and I bought a property for $100,000 and now it’s worth $1,000,000, so I have a $900,000 gain in that property. If I were to pass and my heirs inherit that property, their tax basis is now $1,000,000. So they could sell it tomorrow and pay zero capital gains tax. But the problem now could be right if there is no step-up in tax bases in regards to heirs receiving highly appreciated property, there also could be hit with now ordinary income tax on that gain as well.

Al: Yeah, that’s absolutely right. And so that’s- that’s probably the most egregious idea under the tax proposal, if you will, or tax plan, tax discussion. A lot of experts think that one would be dead on arrival. I wouldn’t worry too much about that one. But just so you understand, if you pass away right now, your heirs get a step-up in basis. So if they sell highly appreciated asset, it gets stepped up to a new cost basis. They don’t pay any gains or losses. Under this proposal, not only is there no step-up in basis, but the actual tax, the gain, the capital gain would be assessed at date of death, which means- this is why I don’t think this will ever happen, because people don’t have the money like- like let’s say someone has a family business or family farm. It would force you to sell that on day one, which is ridiculous. So I’m not too worried about that one. But you should know that that’s in the proposal. I just don’t think that’ll go anywhere. But that’s- that’s a tough one. I-

Joe: Hey, you know, within your CPA career Al, you’ve seen a lot of presidents. You’ve seen a lot of proposals come through. Has capital gains rates ever been the same as ordinary income? And if so, when was that?

Al: Yes, one time. That was George Bush Sr. And that’s when the highest tax rate was reduced to 28% temporarily for like a year or maybe two. And then at that point, the capital gains rates were also at that same 28%. So there was one time. But that’s very unusual. And the reason why you- generally Republicans and most, many Democrats feel like it’s important to have a capital gains rate is that it encourages investment in companies and real estate that produces all kinds of private sector jobs. And so in all likelihood, that’s like I say, that’s probably not going to happen. But- but we’ll- we’ll have to see. You know, a couple more things quickly Joe, is itemized deductions. They would be capped once you’re over $400,000 of income. So you’ll see a lot of the same themes. Biden is basically suggesting that once you make $400,000 or more, you might be taxed a little bit more. So you’d still get your itemized deduction, but there wouldn’t be quite as much benefit.

Joe: What do you think about bringing the SALT back? Do you think that has a chance?

Al: I do. That would be state and local income tax. Right now we’re capped at $10,000. And I think ultimately there’s been discussion by the Democrats of just kind of getting rid of that. The Tax Cuts and Jobs Act, which basically would bring back the- the ability to deduct state taxes, which was is already going to happen in 2026. It just may happen sooner. OK-

Joe: So tell me when they cap these benefits, it’s going to be up to 28% tax level, so if someone’s in a higher tax bracket, they’re not going to get the full benefit. They’ll just- they’ll cap it at the 28% level.

Al: Yeah, it’s kind of confusing, but let’s say you’re in the 35% bracket and you have itemized deductions. What the- what this proposal says is that your itemized deductions are only going to save you $.28 on the $1, not $.35 on the $1, which is your tax rate, which has the effect of basically reducing itemized deductions. So that- that’s kind of how that would work.

Joe: Well, another thing that’s confusing too, that’s not really stated is the $400,000. Is that single? Is that married? Is that head of household: What-what is that?

Al: That’s a good point. That’s anyone’s guess. So it was just a blanket $400,000. So we don’t know right? Is that just for single? And married is going to be a higher level? Or no, we have no idea. So we’ll have to see on that one Social Security tax. This is another one. This is kind of an unusual proposal. But right now, at about $137,000, when you’re salaried, your Social Security part stops, you cap, you max out. And then, of course, your Medicare Part continues indefinitely, but you don’t have to pay any more Social Security tax and neither does your employer. So what the proposal is, is that from $137,000, that rule’s the same. But by the time you get to $400,000, it comes back again. So they call that like a doughnut hole. In other words, from $137,000 of salary to $400,000 of salary, no Social Security tax. But above $400,000, it would come back. So we’ll have to see. A lot of experts don’t think that’s very likely either, but we’ll have to see. We already talked about the no step-up in basis on passing away. But you also should be aware that what’s- what Biden would like to do is reduce the estate tax exemption all the way back to what it was in 2009, which is $3,500,000 per person. And of course, right now it’s- it’s about $11,500,000 per person. So this would be quite a reduction. So for many people, this doesn’t matter. But if you’ve got more than $3,500,000 of assets or a married couple, $7,000,000 of assets, you might want to start thinking about gifting beforehand to- to lock in the much higher exemption. Again, we won’t really know until later whether this will pass. And then finally, I just want to bring up with corporate taxes. Corporate taxes right now are 21%, a flat tax. They were 35% with a graduated schedule. Biden has talked about bringing those back to 28%. So let’s talk real quickly about timing. So Biden gets inaugurated, assuming that he actually wins and there’s a difference of opinions there. I’m not going to go into politics and all that, but assuming Biden wins and he’s inaugurated in January 20th, his focus is obviously going to be COVID and a bunch of other things, probably won’t get to taxes until later in the year. If there’s any change at all, it’ll likely be for 2022. I can’t guarantee that. I’m just giving you real possibilities. So and then of course, who controls the Senate is going to make a big difference and we won’t know that until January or later, depending upon recounts and that sort of thing. So I guess let’s- you wanna talk about CARES Act, Joe?

Joe: Yeah, I guess the point is- is that- I mean, it’s anyone’s ballgame, right? So I think- what we’ve always taught in trying to educate our clients and all of you is we can only really go off what current tax law is. We can speculate on what we think that is going to be and try to hedge against it or try to, you know, do the best guess that we possibly can. But if you’re taking a look at where the current tax environment is today, and if you look at the stimulus due to COVID and everything else that has happened, tax rates can, in my opinion, only really go one way. I don’t know who that’s going to affect. But if we believe that tax rates are on the rise, there’s still plenty of things that you can potentially do to put yourself in a lot better position. The CARES Act gave us a couple of different ideas. The coronavirus related distribution- so what that is, is that a lot of you have a lot of money in retirement accounts. So if you were to take a balanced look at where your money’s held and when you look at kind of taxes and you look at the kind of investments, I know you’ve all seen this 1,000,000 times, but if I look at tax-free dollars versus taxable dollars versus tax deferred dollars, so these are the IRAs and the 401(k)s in the world. If you were to take a look at your overall situation and kind of figure out what percentage you have of your total net worth or liquid net worth and where does it fall. Right. Do you have most money in a brokerage account? Do you have most money in a tax-free account? Do you have most money in a tax deferred account? An example of a tax-free account would be a Roth or Roth IRA or Roth 401(k). So if you were to do the math, what percentage do you have in each of these? If I were to guess, most of your money is sitting down here because we know that there’s like $24,000,000,000,000 sitting in retirement accounts today. That’s a big number. And so when you look here, all of these dollars are going to be taxed at that ordinary income rate. So it’s taxed at the highest of rates. And then this is where all of our income or cash is going to be. And if we believe that those tax rates are going to go up, does it make sense to buy the tax today. You’re just buying at a lower rate is really what you’re doing. So when it comes to looking at a coronavirus related distribution, what does that really mean? It’s like, OK, well, can- can I take advantage of this? The answer is yes, for some of you. It’s taking money out of a retirement account up to $100,000 and it avoids a 10% penalty. It avoids the 20% mandatory withholding, and it allows you to utilize some of that cash. So you have the option to pay the tax on that $100,000 over the next 3 years. Or you could potentially pay yourself back over the next 3 years. So depending on what your situation is and how much money that you have in each of these different pools. Right.

First of all, if you need cash right, hey, I’m laid off, I’m furloughed. They keep shutting us down, right? We’re in in Southern California, we’re in lock down again for the next who knows foreseeable future. And so a lot of bars and restaurants and really small businesses are getting hammered. So if they need cash and capital, they have access to this coronavirus related distribution. How do you qualify? Let’s say if you are affected COVID, your spouse, significant other, maybe you’re furloughed, lost some wages. Maybe you have to stay home just to take care of the little ones because of preschools or- or elementary or junior high or saying, no, we’re- we’re- get home- we’re closing the schools. There’s so many different things that people will qualify for this CRD. So for you, you still have time and it has to be done before the end of the year. So if you want to take a distribution from your retirement account, so if you need the cash to live, then yes, that’s one thing. And then pay yourself back over the next 3 years as you know, things get better. Another way is from a tax perspective, is that does it make sense maybe to pull $100,000 from your retirement account and pay the tax over 3 years for those of you that have very large balances and retirement accounts. Because your required distribution or there’s very little diversification, if you will, within how you’re going to pull your income, it might make sense to utilize this. Another- this year, they eliminated the required minimum distribution, so at age 72, you have to take an RMD. And it’s a mandate by law that says, OK, well, you’ve accumulated all this money, tax deferred into a retirement account. Now it’s time to take the dollars out because they want their tax money. So any dollar that’s really sitting in a retirement account, the tax deduction that you received is not a true tax deduction. It’s a loan. Because you have to pay it back at some point. If I put $1 into a retirement account, I get a tax deduction today. But if that $1 grows and then I pull that $1 out. Guess what? I’m going to pay tax on it. The old adage was, is that hey, if you put money into the retirement account, you’re going to be in a higher tax bracket. So you get a tax savings. And then once you’re retired, you’re going to be in a lot lower tax bracket. So when you pull the money out, you’ll save a little bit. So maybe you save 25% as it goes in, and you only pay 15% coming out, something like that. It’s still pretty small savings if you ask me.

When these plans were established under ERISA almost 45, 46 years ago, the top marginal tax rate was a lot higher than it was today. It was 50, 85% or 80%. So the bang for your buck of putting money into retirement accounts was a lot larger. So when these rules came about, they don’t necessarily change them. They’re pushing it out because we’re living longer. Right. But most people spend their RMD anyway. The other side of that coin is that a lot of you have a ton of money sitting in the required minimum- I mean, sitting in retirement accounts. And so those RMDs might actually push you up into a higher tax bracket. You don’t have to take the RMD this year. But we are encouraging our clients to still take distributions from their retirement accounts because it’s a lower tax rate potentially for you to do so. Start bleeding the money out of the retirement accounts, I think is a really good strategy.

The SECURE Act was signed in December, so almost 12 months ago. That eliminated the stretch IRA. And what a stretch IRA is that again, if you have a retirement account, and you pass away and it goes to the next generation, they’re allowed to stretch the tax liability out over their life expectancy. So if a 20-year old inherits a retirement account and let’s say their life expectancy is age 90, they have 70 years to pull the money out. So 1/70th out of the account, which is a very small fraction that would be subject to tax. The stretch IRA is no longer. Now it’s a mandate, it has to be pulled out within 10 years. So for those of you that have a lot of money in retirement accounts that are not necessarily spending those dollars, that don’t need it, because maybe you have Social Security, pensions, real estate, income, brokerage income, something like that. Well, guess what? When you pass away and it goes to your kids or grandkids, they potentially might get hammered in tax. So everything that you’ve saved and worked so hard for in these retirement accounts could get blown up. So just to understand kind of where you’re at and saying, all right, well, if it goes to Junior, what is that affect going to have? Does it make sense again for me to start bleeding to start believing some of the money out of the retirement accounts to pay it at a lower rate and potentially put it into a tax-free account. Well, then when it goes to the heirs, they don’t pay any tax whatsoever. Another quick thing is that there’s no age limit on retirement accounts or IRAs. So before it’s 70 and a half, you’re shut down, you couldn’t put any money in. But now people are working a lot longer and they need to continue to save. So there is no age limit. So for those of you that have earned income, you can still contribute to an IRA. They’re not going to shut you down there. And I just talked about this, the RMD that got moved to 72. We’ll probably see another care package coming out here. Who knows when? I mean, I think there’s some stuff right now that is trying to get through the House and Senate. They’re talking about moving required minimum distributions to age 75. They’re also looking at eliminating required minimum distributions to anyone that has a balance of $100,000 or less. So there’ll probably be some more changes down the pike. As Al said, is that maybe the first order of business is to put together a stimulus plan. And then from there, they’ll probably tackle health care to save the Affordable Care Act. And then from there, they’ll probably going to taxes. So a tax timebomb. So I’ll pause there. And Andi, do we have questions at all?

Andi: Yes, we do. We have a number of questions. There’s a couple of questions related to the SECURE Act and the CARES Act. So let’s do those real quick. Greggory, he says, “If you are retired, can you still claim the coronavirus related distribution of $100,000?”

Joe: Yeah, if you’re retired, I mean, if as long as you’ve got COVID or your spouse got COVID, yeah, you would be able to qualify for this- this year.

Al: You just have to show that your income was affected by COVID one way or another. So generally, if you’re retired, that’s a little bit tougher. But if you had COVID or your income changed for some reason related to COVID, you could still qualify.

Andi: Another quick one. This one is from Craig. “I think my 23-year-old college student daughter can qualify for the $1200 stimulus check if I don’t file with her as a dependent. My benefit would seem to be only $500 if she is a dependent on my return. Seems like a no brainer, is it?”

Al: It’s a good question. I think the answer to that is generally yes, but it does depend upon your income level and we’ve seen it go the other way. So you kind of have to run it both ways and take a look and see what’s better.

Joe: Yeah, let’s talk about that view of the stimulus of $1200. Is that now for those of you that didn’t get the check this year, when the CARES Act came out in March is that you still will be able to qualify, depending on your income and it will just come to you as a tax credit. So as you’re doing tax planning as the end of the year for- so two things. One, if you did receive the- the rebate, it’s not income. So it’s not like, do I add this to my income to figure out, is it going to be taxed? How is it taxed? It’s not income at all. It’s actually a tax credit that they just advanced to you. The tax credit is going to be paid- for those of you that didn’t qualify in ’19 or ’18 tax return, if you do qualify in your 2020 tax return, it will come to you as a tax credit. So for those rebates, if you did not receive it, you will still be able to receive that rebate. Or if you take a look at your income this year, you will get the tax credit this year if you qualify.

Andi: Richard says “Can you use a charitable donation from your IRA as your minimum required distribution?”

Al: You can, but there is no RMD this year, so it doesn’t necessarily apply this year. But- but generally you can as long as you’re over 70 and a half.

Andi: Ok. Jacqui says “Regarding stepped up basis, if you inherit a house in 2020, will the new basis get locked in? Or does it change if you sell it after or if the law changes?”

Joe: No, if you inherit a house now, 2020, there’s no law change that says there is no step-up in basis. So if you inherit that property today, your basis is what the fair market value is at- when you inherit it.

Al: Yeah, if-

Joe: Yeah, if you die next year, hopefully you don’t. But, right?

Al: Yeah, I mean any- any change like this would be put anything forward. Not in the past. So anything in the past would get grandfathered in.

Andi: Ryan says “If you are in the higher tax bracket over $400,000, does it make sense to roll over any portion of your IRA or 401(k)?

Joe: Yeah, I think it does. Let’s- let’s talk about that, because- let’s go into how the tax system works and what the tax bracket is or what the tax brackets are and where they’re potentially going to go. Cancel.  So let’s do this. I was gonna start another presentation. People are falling sleep. This is awful.

Al: We’re bored with this one already, huh?

Joe: Ok, so here’s the rates, folks. So when you look at the rates, you just kind of want to see where you fall. So this is single. This is married. This is head of household. So I know this is kind of small print, but I’ll just kind of hang out here just for a second, just so you’re clear on how the tax system works and where you are going to fall. So the 10% tax bracket for a single taxpayer, let’s just call it $10,000. So that’s the top of the 10% bracket. The top of the 10% for married is $20,000 and the head of household, it’s $14,000. Top of 12%, $40,000; then it’s $80,000. And then we go up top of 22%, $85,000 for single; $171,000 Right. Then top of 24%, we got $163,000 and then $326,000. So the 24% tax bracket is giant. It’s $326,000. So then- but the 32% tax bracket goes to $200,000 and then it goes to $400,000 and then from there, right, it’s going to next year- if Biden passes whatever tax proposal he does, there’s no more 35% tax bracket for married. It would go directly to 39.6%. So anything over $400,000 goes to 39.6%. If you’re single, you still have a little bit of 35% left, $200,000 to $400,000 and then anything over $400,000 would then get taxed at 39.6%. So the question I believe is that if I’m making $400,000 a year, it does it make any sense for me to do a conversion or to add income. Well, it really depends. It’s how much money do you have in a retirement account? How much money do you plan on spending or living off of in retirement? Are you going to be in a lower tax bracket potentially? If I’m in the 32% tax bracket and making $400,000 a year, am I going to spend $400,000 a year in retirement? The likelihood of these brackets, people staying in these brackets in retirement is true for the, I would say the very wealthy. But I think the average millionaire next door, if you’re in these brackets, you’ll probably stay in those brackets or even higher. Because the 10% is going to stay the same.

But the Jobs Act has expired. This is where the law states today. But the 10% stays at 10%, but then the 12% goes to 15%, the 22% goes to 25% and then 24% goes to 28%. So then it’s kind of looking at what type of end of year tax planning makes sense for you? And where do you fall? And what tax bracket are you in? You have to look at your taxable income. What is your taxable income is going to determine what tax bracket. It’s not your gross income. It’s not adjusted gross income, it’s taxable income. Figure out what your taxable income is. Look at your tax return. And I take a look and let’s say if you’re married and your taxable income is $160,000. You’re that 22% tax bracket. You have some room still in that 22% tax bracket, up to $170,000. So you have about $11,000 more in that 22% tax bracket. Does it make sense for that person to add $11,000 of income and pay that 22%? If that was my situation I would do that all day, every day. Because I’d gladly pay that 22% and put it into a tax-free environment that I know I’ll never have to pay taxes on those dollars again. So the concept of the idea is really to get more diversified. Oops. And your overall strategy, right? Because if I have dollars here, does it make sense for me to create income? And we talked about the CRD here. So the coronavirus related distribution, maybe you take that $100,000 out and you pay 1/3 of tax over the next 3 years. Might be it makes sense. Looking at, again, what’s your taxable income? How much room you have in your overall tax bracket? Right. Or let’s say if you want to do a conversion. So now I want to take money from here and move it up here and I’ll pay the tax because it’s like, man, I don’t trust taxes. I have- I hate uncertainty. I want to take uncertainty off the table and I’m going to move money here to here. I’ll gladly pay the tax because I know what the tax burden is. I’ll pay it. But then now I have these dollars sitting here that will forever grow tax-free. I’ll never pay another dime in tax here. This is unlimited. There is no dollar limit to do a conversion. You want to convert $100,000, $40,000, $50,000, $1,000,000. It doesn’t matter. You just pay the tax today on whatever that you convert. So understanding where you fall today, where you think tax rates are going to go, this is the planning that you have to do. If you’re in the 10%, 12%, 22% tax bracket, to me, that’s like triggers. All right. I got to at least look at this. Even the 24% tax bracket, it’s a giant bracket, it’s like $300,000 for married couples. Might make sense. Right? Then it’s here. No more tax, at all. I take the uncertainty off the table when I have large balances here in retirement accounts.

So we talked about a CRD. We talked about a required minimum distribution. There is no RMD. However, we’re still saying it might make sense to take money out of here and move it up to a tax-free environment. Convert your RMD. This is the only year that you can do that. So understanding where you fall tax-wise is so key to determine do I accelerate the income, or do I try to create deductions? Some of you might want to push deductions until next year. Because it could be a higher tax rate for you. But for those of you that are in a higher tax bracket, it might make zero sense to push your deductions into next year if you’re itemizing, because they might cap you at 28%. But then are they going to bring the SALT back? Well, if they do that, that’s great. Because that’s going to increase my itemized deductions. But it’s still might cap me at 28%. So maybe take the deduction now. I don’t know, we’re just- we have no clue. But it’s ideas, it’s things that you have to start considering and looking at each year to really put more dollars into your pocket and do what you possibly can to put those dollars back. Control what you can control has always been kind of a big theme of ours. So, again, here’s your tax tables. Where do you fall? How much- do you want to create income? And pay those rates? 10%, 12%, 22%, 24%. And then back to our question. Well, if I’m in the 32%, that could be dicey. But if I got a couple million here. Yeah, absolutely I would do that. This is not advice, by the way, either, folks, we’re just chatting.

Ok. Here’s your cap gains rates. So right now, there’s a 0% capital gains rate. That’s this pool over here, this taxable pool, 0%. So if you have a stock, bond, mutual fund, if you’re in that 10% or 12% tax bracket that might be going away, you want to sell that, not pay no tax, buy it right back. You just increase your overall basis. 15% bracket and the 20%. The 20% now over $1,000,000 is going to turn into ordinary income, hypothetically or potentially or maybe or hope not- whatever. So- looking again at the balance of your overall situation. Where do you fall? What makes sense? And then filling up your overall brackets might make sense for one strategy as a conversion, but then you might want to look at a CRD, converting your RMD and so on, because the stretch is going away and so- stretch is going away. No RMD. We got the CRD. And then some other things real quick. If you’re in that 0% capital gains rate, it doesn’t make sense to convert probably. Because then that pushes those items that you sold in your brokerage account. Now they’re going to be subject to tax. We got the QBI deduction. Sometimes if you add income there, you’re going to reduce your QBI deduction. For you small business owners, IRMAA. So if it’s going to increase your Medicare right, you’ve got to take a look. Because some people do conversions, increase their overall income and then two years later they get hit with- But why is my Medicare premium doubled? Well, it’s because you added the income from the conversion. You just need to understand what’s the side effects of doing some of this stuff. Ok? Let’s see, what do we got? We got about 10, 15 minutes left to go here. Andi, we got some more questions? Or should we kind of power through? How many do we have?

Andi: 1, 2, 3, 4, 5, 6, 7, 8 more questions.

Joe: So Al, why don’t you go over a couple of these tips? And then we’ll come back and we’ll wrap it up and answer all those questions.

Andi: Sounds good.

Al: Ok, we’ll do this rather quickly. But these are things to think about between now and year-end. One is called tax loss harvesting. So if you have capital gains, if you sold a stock, bond, real estate, at a gain this year, something outside of your retirement account, and you also happen to have other stocks that are in a loss position, it’s a great idea to sell those stocks, mutual funds, whatever, create that loss. It goes against those other capital gains, dollar for dollar. And if you have more losses than gains, then you get to take another $3000 against ordinary income and the rest carries over. By the way, this is also a good strategy, even if you have no gains, because the carryover is year after year for a time when you do have a gain. Now, when we tell you to sell your stock, we’re not saying to get out of the market, buy something similar. You can’t buy the same exact thing because of the wash sale rules. For some of you, it’s just the opposite, though. It’s the gain harvesting Joe was talking about. If you’re in that 10% or- or 12% bracket, your capital gains are taxed at 0%. So you might want to- to take some gains off the table and not pay any current tax. Another one is a- is a backdoor Roth. This is actually something that you can do after year-end all the way to April 15th. This is where you make a IRA contribution and then you turn around and convert that into a Roth IRA. There’s several caveats here.

First of all, you have to have earned income to be able to do an IRA contribution. And secondly, this really is only if your income is high. If you’re- if you’re single and your income’s above about $140,000 or married above 200,000. If you’re- if you’re above those levels, then this is where this strategy comes into play, because otherwise you can do a direct Roth contribution. In this particular case, you- you go ahead and do the IRA contribution. You go- then you do the conversion. But there’s that pro-rata rule, which means if you have other IRAs, it gets a lot more complicated. Moving on quickly, let’s go to the gifting strategies. We know that if you give before year-end, you get that deduction. It’s an itemized deduction. In many cases, people don’t have enough charities that they want to give to, to be able to itemize. But there is a way to take future year contributions and deduct them all in the current year. And that’s by opening up and putting your money in a donor advised fund. You could put cash, stocks, or other assets into this fund. The year that you put the money into the fund is the year you get the tax deduction, but then you get to decide how to dole out those funds over time. You know, there’s no limitations on what you do. Best way to take advantage of this, of course, is to donate appreciated stocks because the- the value of the stock is what you get as far as a tax deduction and you don’t have to pay the capital gain rates. But again, this would have to be set up before year-end. So, Joe, very quickly, those are some things that people ought to be thinking about between now and year-end.

Joe: Very good. Andi, let’s- let’s get some questions up. And then before we do that, too, we’re at the 45 minute mark is that- we’ve got a couple of weeks left in the year. We know we kind of went through quite a few different ideas and strategies, but it’s really difficult to give any type of real advice through a webinar and through a camera without knowing what your situation is. We’ll stick around as long as you want to answer any questions that you have. But I still think a lot of you still get confused on the strategies that you hear from us. If you want to take advantage of our tax reduction analysis, it might take 45 minutes to an hour. Just click on the button and schedule an appointment. You know, have Big Al take a look at your tax return. He can probably find a couple of things in a couple of minutes. You know, here’s some ideas that we have for you. Here’s what to expect. Here’s what you need to do. This is our gift to you. So if you want to take advantage of it, please do so. If you don’t, don’t worry about it. But don’t make mistakes, because if you blow up your taxes, a lot of is irrevocable. You can’t go back and change it, such as a Roth conversion. You can’t go back and re-characterize. So if you end up paying more money in tax, those are dollars that are lost forever. So please, please don’t do that. All right. Let’s- let’s go to some questions.

Andi: Ryan had a follow up question. “Does the rollover-” I think he means conversion- “have to happen by the end of year 2020 or by April 15th of 2021?”

Joe: I couldn’t  (room noise)  and listen to you.

Al: Yeah, I did. A conversion, if it’s- that’s the question, if it’s a Roth conversion that needs to be done by December 31st to affect this tax year. A contribution, that’s a little bit different, that’s $6000 or $7000, if you’re 50 and older. That can be done by April 15th of the following year, if you have earned income.

Andi: All right. Stuart says ” I’m doing a Roth conversion this year. Do I have to pay estimated tax in 2020 for the amount that I will owe due to this conversion?”

Al: Yeah, it depends on a few things. First of all, if you’re withholding this year or other estimated payments, cover last year’s tax liability, you probably don’t have to do any additional estimated payments. On the other hand, if it’s not, then you may have to pay estimated payments. But if you do the conversion right now, then it’s only going to affect your 4th quarter estimated payment, which is due on January 15th. There’s something called the annualization method, which means you had uneven income during the year, which allows you to go ahead and make the one estimated payment by January 15th and avoid penalty.

Andi: Yanni says “I’ve been maxing out my 403(b), 457 and Roth IRA every year. Any suggestion where to invest beside putting into those 3 accounts to lessen my future tax taxable income?

Joe: Oil and gas.

Al: No, not really.

Joe: You could go for low income housing, some tax credits. They’re a great tax play, but awful investment.

Andi: Rick says “I made some post-tax contributions to my traditional IRA. What’s the best way to move those funds to my Roth?”

Joe: Well, first of all, look at Form 8606 on your tax return if you filed that. So if you have post tax dollars within the Roth or within your IRA, you can get those dollars out. A couple of different ways to do it. One is that you could potentially move the IRA into your 401(k) if you have a 401(k). Because the 401(k) will not take post-tax dollars and then that isolates post-tax dollars from the IRA. Then from there, you could convert that into a Roth IRA without any tax consequence whatsoever. So that’s one way to kind of isolate it. Another way to look at it is just to figure out, what is the pro-rata? How much is post-tax versus after-tax? If it’s not too bad, maybe you just convert the whole thing. So let’s say I have a $20,000 IRA, $10,000’s post-tax, $10,000’s after- or pre-tax and I convert it. I’m only going to pay tax on $10,000. I got $20,000 into the Roth. So it’s just first of all, I guess the first step you want to take is, how much you have in post versus pre, and then from there, if you have a 401(k), you can move it. And if it’s eligible you could roll that in and isolate it. Or maybe you just convert the other or you could, you know, there’s other things that you could potentially do, but I’m not going to go into them now.

Al: Yeah. Quickly Joe, one thing about the pro-rata rule is you have to view all of your IRAs as though there were one accounts. You can’t isolate one account and say, OK, I don’t have any pre-tax dollars or post-tax- I just have the post-tax dollars here. So in other words, it’s as if you had one account. And interestingly enough, 401(k)s, 403(b)s do not count in this computation, but all your IRAs do.

Andi: Ok, we touched on this in the podcast that just released yesterday, but I think it would be useful for this audience as well. “Al mentioned capital gains being stacked on top of the income. Does this mean you can potentially calculate a larger Roth conversion amount while ignoring the amount of a capital gain?

Al: Yes. So let me- let me explain. So that’s- the way- the tax code works, is your income is added together, your ordinary income, your capital gain income’s added together and you’re taxed first on your ordinary income. So whatever your ordinary income level is, is the ordinary income tax. Then capital gains sit on top of that, meaning that the capital gains rates get taxed after that. So the capital gains rates did not push up your ordinary income rate. So that’s the good news. The bad news is, though, if you have capital gains, it’s increased your income, which means that you may be more subject to other phase-outs, which may make more your Social Security taxable, may make less of your rental property losses deductible and so on. May- may make higher Medicare premiums in a couple of years. So- so just be aware of all these things. But that’s the basic idea, is that ordinary income is- even though ordinary income and capital gain is added together, ordinary income is taxed first, capital gains then get taxed second after that.

Andi: Ok, David says “My wife and I have small IRAs. We can probably prove that we were negatively impacted due to COVID. Can we close out the IRAs, about $70,000 and $120,000 and use the money to buy real estate or spend it on anything?”

Joe: Why on earth would you want to do that? But, yes. Blow it out, but then you just pay the tax over 3 years. Right. So if you want to take the money out of the retirement account $70,000 and then pay the tax over a 3- year time period, yes. That would mitigate the tax if you wanted to use that to buy some real estate or spend it on whatever that you want.

Andi: I got another question. “I was recently laid off by my company. I plan to convert 401(k) to IRA. Did you say that I can convert any amount from IRA to Roth at any time, not just at the time of converting from 401(k) to IRA?”

Joe: So you go to 401(k), you roll it into an IRA. So you’re doing a rollover.

Al: Yeah.  No tax- no tax at that point.

Joe: You’re getting out of the company plan. You’re moving it into your own IRA at wherever. And then from there, you can then convert whatever dollar figure that you want into a Roth, $1 or $1,000,000 or the entire balance. Or you might want to just look at what bracket that you’re in and max out your bracket. So you can do that at any time. It needs to be done in the calendar year in which you want to pay the tax on. So let’s say in this year, you’re laid off, so your retirement or your ordinary income or taxable income is lower than most years. Well, then the conversion needs to get done before December 31st if you want to take advantage of this tax year.

Andi: Ok, Gregory says, “I am strongly considering opening a solo 401(k). What benefit is there to doing this by year-end?”

Joe: Solo 401(k)- you can fund the all 401(k) from your income. You can go dollar for dollar depending on your age, right, you put $25,000 roughly into the solo 401(k). Let’s say you if have $25,000, $30,000 of income, you can max that thing out and shelter, you know, a ton of income. Then you have next year to fund the profit sharing plan on top of that, which is 25% the profits of your business. So you could put up to around $60,000 roughly into the solo 401(k) plan, depending on how much income that you have. So yeah, it needs to be funded and opened in the calendar year from a 401(k) perspective. But the SEP plan, you have until October of next year to actually fund it for this year’s profits. So we would encourage you to probably fund that now. Or at least open it.

Al: Yeah. And the funding rules are slightly different if you have a corporation versus not. So just be aware of that.

Andi: Richard says, “Is my pension considered earned income?”

Al: No.

Joe: Yes.  Well, it’s no, it’s not earned income, it’s ordinary income. I’m sorry, thought that’s what she said.

Andi: David says “My wife is inheriting $240,000. We are receiving that check this week. I’m assuming that we will receive a K-1 showing income earned this year. Also, I’m assuming that tax will be ordinary income. Any strategies to minimize the tax on that $240,000?”

Al: Well just- yeah. Interestingly enough, if it’s, if it was inheritance, there is no tax on an inheritance. That comes to you tax-free. However-

Joe: Unless it’s from a retirement account or an annuity.

Al: Yeah, Yeah. Two caveats. So one is if the- if the executor or trustee I guess in this case had- if there was earnings on that- those investments during the period of time, there would be a K-1 and there might be a little bit of interest income, dividend income, that sort of thing. So that’s one thing. The second thing is, right Joe, is if it’s the retirement account, then yes, it’ll come to you as a beneficiary retirement account, not currently taxable, but once you pull the money out, then, of course, it’s taxable at that point.

Andi: Matthew says “If you have a 401(k) with traditional and Roth money and you convert to IRA when you leave the company, I assume it splits to a Roth and a traditional IRA without any effort.”

Joe:  No. Next.

Al: The answer is yes, it does. You can send it two different directions, but you need to direct it to have that happen.

Andi: You have to do it yourself.

Joe: They’re not going to know. So you want to make sure you have a Roth IRA and a traditional IRA. So when you convert, you move the Roth money into the Roth and then the 401(k). So place the call, make sure you talk to the right representative, say here’s my Roth account number. Here’s my IRA account number, In a roll over, they’ll cut you the check. Then they’ll have two separate checks Make sure the dollar figures are accurate for the Roth.

The dollar figure is accurate for the traditional IRA. Deposit those accounts there. We’ve seen multiple, multiple mistakes and then it’s no bueno. So just make sure when you’re doing that, you get it. Don’t- don’t take advantage. Don’t think that the HR or the people that are working on the 800 desk care about your money. They don’t. You need to care about your money and don’t assume that they’re going to do everything right. Hopefully they get it. But just triple check. It’s important.

Andi: Our buddy Tim says “I recently read one of your show transcripts where you brought up the idea of a home equity loan at the current low interest rate to pay taxes. How do you go about deciding to do that type of loan versus paying the taxes from the funds transferred from a traditional IRA to a Roth IRA?”

Joe: Why? Why would anyone read the transcripts, first of all? Thats- Second of all, if you read the transcripts, Tim, we said we would only recommend that in very, very few circumstances. And I’ll explain that once again. Ok, is that when you look at- give me full screen here real quick. So if I have a lot of money here and no money here and no money here. Right. I’ve got to figure out. All right. Well, I’m going to get killed in taxes because my required distribution is going to shoot me up into like the 35% or 33% tax bracket because I was good and I had a defined benefit plan. And I had a pension and I got millions of dollars here. And every last dime is going to be stuck at ordinary income rates. And if I want to create some liquidity by moving money up here, I’ve got to pay the tax. There’s two ways to pay the tax here. You can pay the tax out of the account. So if I move a million dollars here, I’m going to pay a tax on $1,000,000. But I might also have another couple hundred thousand dollars in tax to move $1,000,000 up. I don’t have a few hundred thousand dollars, so I could take a few hundred thousand dollars out of my retirement account and then pay another tax on the tax to pay the tax. If that is you Tim, which I don’t think it is, then we might say there’s other ways to do it. We can create liquidity, but you might, may, very small instances. You would look at creating debt and pay a 2% or 3% rate to help pay that tax, because we know when the RMD finally start kicking out for some of these people, they’re going to have so much excess income that they’re not spending, they’re just paying tax on it. Now they’re putting it here in a brokerage account or your savings account or your checking account because they’re not spending all the money that is kicking out from the RMD.

If that is that situation, then you would just take that excess income and then pay off the note, but then you are able to create some tax-free here. Another way, for some of you that have all your money here that don’t want to pay the tax out of the retirement account, and if you qualify, you could do a CRD as well. So let’s say I convert $50,000 and my tax bill is $5000, but I don’t have $5000 extra and I qualify for a CRD, a coronavirus related distribution. I could take a $5000 CRD, pay the tax for the conversion and then pay myself back $5000 over 3 years. So there’s different things for different people. I think that’s why we encourage you get a tax reduction analysis so we can kind of take a look at where you sit, where you fall, what makes sense, what doesn’t make sense. Ask us all the questions in the world. We’re here to help you. We want to make you better. We want to make you smarter. We want to make you wealthier. And that’s it.

Andi: You can click on that link and just put it on the calendar for whatever time and date is most convenient for you.

Joe: Yeah, our promise to you is that we will get everyone in. It has to be done though today, so get it in over the next week or two. Our promise is that we will make sure that we can do this. Don’t procrastinate. Don’t wait. It’s not gonna hurt ya. And then we’ll go from there. All right. That’s it. Thank you all.

Andi: Thank you, gentlemen. Have a good day.

Al: Bye bye.

Andi: Bye bye.


Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.

Pure Financial Advisors, LLC does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.