Tax Questions for the Homestretch

Steve Merrell |

I don’t know about you, but the rapidly approaching end of 2020 leaves me feeling a bit tired. On one hand, I find it hard to believe that we are already in December. (Didn’t I just put the Christmas decorations away?) On the other hand, pre-COVID life seems like a distant memory.

The end of the year is a good time to review your financial situation for possible tax-saving opportunities. Here are some tax-related questions you might want to discuss with your tax professional or financial advisor.

1. Are tax rates going higher next year? Although the drama of the presidential election is mostly behind us, financial planners are still anxiously awaiting the outcome of the Senate runoff elections in Georgia. If Republicans win, the Biden tax plan will likely be stymied. However, if Democrats win, high-income households will likely see much higher tax rates. Unfortunately, the runoff elections won’t be decided until January 5—too late for planners to help their clients get ahead of the Biden taxes.

2. Should I do a Roth IRA conversion? The decision to Roth or not to Roth is really a decision about future tax rates. If you expect you will be in a higher tax bracket in the future, a Roth IRA probably makes sense. As you ponder this question, remember that the Trump tax cuts are set to expire in 2025 unless Congress acts to extend them. Given the Republicans’ razor-thin majority in the Senate, an extension looks unlikely at this point. However, a lot could change in the next four years.

A Roth conversion may be even more attractive if your reported income is temporarily reduced. For example, maybe you retired recently and are living on social security augmented by taxable savings. As you spend down taxable savings, your reported income will be low, so a Roth conversion could be done at a relatively low marginal tax rate.  If you think a Roth conversion might make sense for you, you need to take action by December 31.

But be careful! In the past, the tax code allowed you to do a Roth conversion and then unwind it later the following year if you changed your mind—something called a recharacterization. That was taken away with the 2017 tax reforms, so be sure it is something you want to do before you pull the trigger.

3. Should I prepare to itemize deductions? The standard deduction in 2020 is $12,400 for individuals and $24,800 for married taxpayers filing jointly. That’s pretty high, but instead of assuming that it won’t pay to itemize your tax deductions this year, you might want to do some simple math. The itemizing threshold might be closer than you think.

For example, the credit agency Experian reports that the average mortgage balance for Californians is $363,537. Assuming an average mortgage interest rate of 4% means that Californians pay, on average, $14,540 per year in mortgage interest. It seems pretty clear that many Californians will still find it beneficial to itemize their deductions.

4. Should I use a donor-advised fund to bundle my charitable contributions into a single year? If the higher standard deduction keeps you from itemizing deductions, you will not get the full tax benefit for your charitable giving. However, bundling several years’ worth of contributions with a donor-advised fund may help you over the itemizing threshold. The donor-advised fund is essentially a pool from which you can direct charitable giving in the years ahead. You get the benefit of itemizing while still maintaining control and flexibility. If this sounds interesting, check with the Community Foundation for Monterey County. They have a wonderful donor-advised program and they can fill you in on the details.

5. Should I do a qualified charitable distribution (QCD) from my IRA? QCDs allow you to give up to $100,000 directly from your IRA to a qualified charity without recognizing the distribution as income. Although the CARES Act suspended required minimum distributions for 2020, a QCD would allow you to use your IRA funds to show support for your favorite non-profit without inflating your reported income. Keeping your reported income as low as possible could help you avoid the dreaded Income Related Monthly Adjustment Amount, or IRMAA, on your Medicare Part B premium.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to