Tax Planning and COVID: Extract Some Good From the Bad

The events of the past few years have brought significant changes to the lives of almost everyone, and our financial future as a country is tenuous as a result!  As Fall takes hold, there is still time to at least make one glass of lemonade from all the lemons, but people need to put time on their calendar in November to focus on their own opportunities, or risk not discovering the one benefit they might receive from a global pandemic.

There are many categories and levels of financial affects that have taken place, but for simplification in this case we will separate everyone into two groups.  People negatively affect (many ruined or greatly wounded) and those on the other side, people and companies that are benefiting financially because of the pandemic, due to the industries they are in.  Or simplified, the unlucky and the lucky.

The woes of the unlucky vary greatly.  So, for example, if all regular income has ended, savings are now gone and mortgage payments are on hold, then there are not likely retirement accounts, and nothing to be done except hang on!  For the unlucky that are down but not out; perhaps a business owner whose income is down 50%, or a married couple who have lost one of two jobs, there is likely still a 401(k), IRA or other retirement account.   With less income in 2021, or a business loss instead of a gain, this could be a good opportunity to convert those pretax accounts to Roth IRAs.  Paying taxes now on those accounts might simply bring those people back up to normal income levels and tax outcomes, within reason.

But don’t speculate.  Go to your tax planner or preparer and have them put your approximate numbers in their tax software.  Adjust for different income or Roth conversion amounts and dial it in, so you get it right and don’t trigger a surprise tax or lose out on a child care or education credit because you made ten dollars too much.  Be careful, but take advantage, and in retirement you may have more tax-free growth and income because of that pandemic you went through back then!

The lucky are up in income, and there are many advanced tax planning tools out there to help them explore ways to mitigate the tax consequences of their higher income.  Perhaps this is the year to meet with a tax planner and explore the possibility of buying tax credit investments, doing charitable work or buying real estate. There’s always something that can be done, but again look at the calendar and put time to meet with someone, and then evaluate the different approaches that they present.  It would be a shame if you let the time go by without planning your outcomes in advance, as you might gain financially only to lose much of it to unexpected taxation.  Proactively planning your tax outcomes is one of the few things that are within your control in 2021!