Financial Planning Matters: Our Top Four Tax Mitigation Strategies Ahead of New Legislation

Steve Kohler, CFP®, CPFA and Nancy Kunz, CFP®, ChFC®, CLU®

With a change in tax legislation all but certain, we are fielding more and more inquiries regarding planning strategies to minimize the impact of increased taxes. Of course, specific tax strategies must be considered within the context of one’s entire financial plan. However, reducing future tax burdens can be an effective tool in maximizing long-term wealth.

Of recent note, it now appears that the administration’s budget for the upcoming fiscal year will assume the new capital-gains tax rate is retroactive to late April of this year. If the capital gains rate is in fact retroactive, it may already be too late for high-income investors to realize gains at lower tax rates.

Nevertheless, there are still alternative strategies to reduce future tax bills. Here are four key strategies related to retirement planning, estate planning and investing:

1) Protect your retirement assets.

With potentially higher tax rates in the future, it may be a good time to convert retirement accounts and pay taxes at the lower current levels. If you are nearing or at retirement age, there may be merit in moving assets from a traditional IRA or 401(k) plan.

What we may recommend:

Consider a Roth IRA Conversion. For those with traditional retirement accounts, making moves ahead of tax law changes could reduce income-tax bills in retirement. Roth conversions allow account owners to transfer some or all of the money in a tax-deferred IRA or 401(k) to a Roth account, in which you contribute after-tax dollars and get tax-free withdrawals in later years.

2) Check your estate plan for higher transfer tax liabilities.

The possible repeal of the 2017 Tax Cuts and Jobs Act (TCJA) could significantly change the current transfer tax landscape. The discussions are as follows:

  • Potential lowering of Federal Estate Exemption amount.

  • Possibly higher tax rates on Long-Term Capital Gains.

  • Potential elimination of step-up in basis at death.

  • Itemized deduction changes that could affect charitable donations.

What we may recommend:

  • Thorough review of your overall tax strategy.

  • Research potential value of a Roth conversion.

  • Evaluate proper gifting strategies.

3) Check for estate tax advantages on your life insurance policy

A tax increase could make tax-deferred tools more attractive to individuals who are planning for retirement. In addition to IRAs or deferred annuities, life insurance could substantially mitigate the increase.

Life insurance proceeds can receive tax-free benefits when they are paid to your beneficiary. However, while the proceeds are income-tax-free, they may still be included as part of your taxable estate for estate tax purposes.

Estate taxes on life insurance may soon impact more people, especially if the estate tax deduction drops to $3.5 million. If you are a policy owner or trustee considering surrendering or selling a policy, we recommend a policy review as soon as you are able.

What we may recommend:

Owning the insurance in a properly written trust can pass the proceeds outside the estate.

4) Implement tools to reduce capital gains on investments

If your earned income is more than $1 million annually, the proposed capital gains tax rate will nearly double from 20% to 39.6% on the sale of assets like stocks, residences, or businesses. Both short and long-term capital gains would be taxed as ordinary income for families with incomes over $1 Million.

What we may recommend:

  • Gifting assets to loved ones prior to death to take advantage of the Estate and Gift Tax Exemption.

  • Gift appreciated assets to qualified charities and use the resulting deductions to offset other income.

  • Harvest your investment losses if they are greater than your capital gains to offset those investment gains.

While we are awaiting the final budget, taking steps now to review your situation could protect you from new as well as future tax increases. As always, please contact our team with any questions as to how these changes may impact your financial plan.


Steven Kohler, CFP®, CPFA

Senior Financial Advisor

Financial Planning Chair

Nancy Kunz, CFP®, ChFC®, CLU®

Financial Advisor

This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views

and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.

The impact of the outbreak of COVID-19 on the economy is highly uncertain. Valuations and economic data may change more rapidly and significantly than under standard market conditions. COVID-19 has and will continue based on economic forecasts to have a material impact on the US and global economy for an unknown period.


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