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End of Year Tax Problems? Some Strategies to Consider...

End of Year Tax Problems? Some Strategies to Consider...

December 11, 2020
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Welcome to the Weekly SUMmary - 12/11/2020

As the end of the year nears, we've all been through a crazy ride in 2020. The markets were about as volatile as they've ever been. We saw a drop of around 35% (S&P 500) earlier in the year, and now the markets are at all time highs. At time of this writing, one of the major US indexes (NASDAQ) is up over 35% year to date. CRAZY!

With that in mind, there are those that have had a difficult time throughout this pandemic. There are those that have thrived and made more than ever. One interesting portion of the population typically is forced to take distributions from their accounts (in the form of Required Minimum Distributions, RMDs), even though they may not need the funds. With a pandemic shutting down a lot of extracurricular activities that may have used up additional funds in a typical year, many may have excess at the end of the year. Due to the suspension of RMDs this year, some may want to put that distribution that is not required in 2020 to use for themselves, a relative or possibly even a charity.

There are a myriad of ways that one can use their funds at the end of the year. Many of these options have tax benefits either now or in the future.

  • Tax loss harvesting is a way to offset gains by selling losses.
  • Education funding - If you have kids/grandkids that are in college, a direct distribution from a retirement account to the higher education institution for tuition can1 be made without any tax implication.
  • Donations to a charity - as long as it is a registered 501(c)(3) can be made from retirement accounts through what is called a Qualified Charitable Contribution (QCD).2
  • Utilizing Donor Advised Funds - These funds are created through a "sponsoring organization"3. Basically, one makes a large contribution2 to a "fund" that receives a tax benefit. The sponsoring organization now has control of those assets/funds, but the donor plays the role of the advisor of how to utilize those funds. One is able to "advise" on those funds into perpetuity (until the funds are used). In the meantime, those funds can be invested, allowing them to fluctuate with the investment and potentially make even more impact over time.3
  • Gifting - If one would like to pass on wealth, the current gift tax exclusion amount is $15,000 per person without requiring documentation. If you gift more than $15,000 you will need to report this and it will count against your $11.58 million lifetime gift tax exemption (as of 2020). The beauty of the annual exclusion is that there is no limit to how many $15,000 gifts can be given without the need to report the gift.
  • Roth Conversion - this is for future tax benefit (see more here.)
  • Contributions! See more here.

There are potentially more ways to plan for distributions or what to do with additional funds at the end of the year.

With all of these options, I know it can be confusing to decide what one may want to do. Please feel free to reach out or set an appointment to discuss.


1. There are always limits to how much can be taken without any tax implication. In this instance, as mentioned, the distribution can be used for tuition. Room and board would not be eligible for a tax free distribution.

2. The IRS maximum for tax free donations is $100,000.

3. This assumes growth with time. Say one puts $100,000 into a donor advised fund but is still deciding on what specific cause to donate to, if that investment earns %5 before use, the donor could potentially donate $5,000, leaving the original $100,000 in tact for additional potential growth or future use.

Please discuss any plan or ideas with an advisor prior to making any potential changes. Nothing discussed should be construed as tax advice or recommendations. Any information provided has been acquired through experience in the financial services industry or advanced education.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Waddell & Reed, Inc. as to the accuracy and is not intended to be used as the basis for any investment decisions. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Waddell & Reed and it representatives do not offer tax advice.  Please consult your financial and tax advisors before making financial decisions. The S&P 500 index and NASDAQ index are unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results. (12/20)