Tax Planning Part I: Planning for Retirement

Chris Davies, CPA

This is a two-part series on tax planning. First, we hear from Chris Davies, president of Davies Tax Advisors[1], a CPA with whom Mainspring works closely to provide tax strategies for clients. Stay tuned for Part II, where we hear from Caroline Alabach on the ways to convert your retirement savings to limit taxable income in retirement.

As we draw near the end of an extraordinary year, one outcome we have seen is a consistent desire of clients wanting to be proactive with tax planning. Whether the conversations center on COVID-19 or the election, there are a number of tax implications that are important to discuss at this time of year.

Tax Code

An election year and not knowing if there is a change in tax code might have us advise to do something differently than a non-election year. For example, we generally advise clients to push off income into future years, however this year it may be a good idea to accelerate it. Meaning, some people may consider selling appreciated positions to realize gains in 2020 before tax rates potentially increase with president-elect Biden. Additionally, the runup in the stock market has people questioning if this will continue and they are trying to figure out if they should pare back some gains. If they do, it’s important to determine what the tax consequences (short-term and long-term) could be.

Stimulus Provisions

Many of our clients are business owners and everyone seems to be seeking clarification around the forgiveness of PPP loans: Will these funds be treated as taxable income? What should be included in the forgiveness application? When should the application be submitted? Our team has been doing a lot of analysis on this program and are working with individual clients to make recommendations that best fit their unique situations.

For PPP loans that are yet to be forgiven, there is currently a lot of speculation as to whether Congress will consider those loans as income and if it is eligible to be taxed as such. There is a large piece of legislation on this topic that is deadlocked, so no action has been taken. To avoid any surprises regardless of what legislation is passed, we are advising clients to consider any amount they received as part of the PPP loan as taxable income.

Stimulus checks are also a current hot topic for our clients. For anyone who is still expecting to receive an individual stimulus check, the IRS is behind and processing times are lagging. It’s important to note that individuals are still eligible if their 2019 or 2020 income qualifies. For those who qualify and are still waiting for the proverbial ‘check in the mail’, it’s likely you could see your stimulus payment as part of your 2020 tax return. A number of clients who have received stimulus checks have also wondered whether or not they will be taxed on the payment. The short answer is no. The IRS does not consider it income and it will not impact your 2020 tax refund or amount owed when you file next year.

What has remained consistent this year is that there is no one broad recommendation for clients. What is most important to us is that, regardless of their situation, we are considering their overall financial well-being and that includes inviting their advisor into the conversation. This is the time when you want your entire team to rally around you because this year isn’t just about tax implications or consequences but being able to stick to your financial plan and goals. To put it simply, be proactive in your planning.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Raymond James is not affiliated with Chris Davies or Davies Tax Advisors.

[1] Davies Tax Advisors