SBK / 17 Apr 2020

Coronavirus Coverage: Leveraging Tax Savings & Other Planning Opportunities

SBK Planning Series:
April 2020

Given the precipitous drop in financial 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 assets may consider converting to a Roth IRA, as the market selloff has reduced IRA 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 to a Roth IRA is a taxable event (taxed at ordinary income rates) thus, there are numerous variables to consider:

Tax Rates How does an individual’s current marginal income tax rate compare to anticipated future income tax rates?
Cash for Taxes A Roth conversion is more beneficial if taxes due for the conversion can be paid from a source other than the Traditional IRA
Time Horizon The tax advantages of a Roth IRA multiply over a greater time horizon
Nest Egg Would the taxes due for the Roth conversion potentially impair an individual’s pool of assets needed for retirement?
High Net Worth Individuals with assets likely to be in excess of the federal estate exemption (currently $11.58 million per person) may benefit from a Roth conversion as the taxes paid for the conversion reduce the size of the taxable estate


  • 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.


  • 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.


For more information on how we are working with our clients on tax savings and other planning opportunities through this continually changing landscape, please contact an advisor at SBK Financial.

SBK is a wealth advisory partner offering holistic, independent and objective wealth management services.  Our customized and comprehensive approach enables us to generate tailored solutions for you and your family – every step of the way.