2020 Tax Planning Tip: Additional considerations

Is this a good year to convert to a Roth IRA?

If you have been thinking about converting your tax-deferred traditional IRA to a tax-free Roth IRA, this may be the year to consider it.

Converting a Roth IRA will allow you to make tax-free withdrawals in retirement and to avoid having to take RMDs. However, there is a tax cost to converting. Any savings you convert that were not previously taxed will be subject to ordinary income tax in the year of the conversion.

One reason to consider a Roth conversion this year is that federal income tax rates a re still relatively low so you may pay less tax on a conversion this year than in later years. (Federal income tax rates are scheduled to increase after 2025.)

Will you have to pay the AMT?

The alternative minimum tax (AMT) is an alternative method of calculating tax that eliminates or reduces some of the deductions and exclusion from income that are allowed when calculating tax the regular way.

Far fewer people are currently subject to the AMT than prior to 2018, thanks to changes made by the Tax Cuts and Jobs Act. However, the AMT is still a possibility for some people, particularly high-income individuals who exercise incentive stock options without selling the stock in the same year or who receive tax-exempt interest from private activity bonds.

It’s a good idea to find out whether you may be subject to the AMT before making any year-end tax moves. If it looks like you will be, we can recommend strategies for minimizing AMT’s impact or perhaps avoiding it altogether, so please reach out to us in Williston (802.878.1963) or Rutland (802.775.7132) for personalized advice.

This article is published in the November 2020 edition of Eye on Money. If you would like to be added to Copper Leaf Financial’s mail list for this publication please email [email protected]. 

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