Tax Connections Newsletter – Summer 2020
Ryan Kertes

Year-end tax planning for investors

Volatility might be one word that could describe the financial markets in 2020. As we approach the end of the year, it is a good idea to review your portfolio and consider different strategies. There might be some opportunities in your portfolio to reduce your tax bill, reduce risk and make sure that investment plans align with your personal plans. Here are a few planning ideas that might be worth exploring.

Convert to a Roth IRA

If you have been considering converting a traditional IRA or 401(k) plan into a Roth IRA account, now may be an ideal time. Roth accounts offer many benefits, including tax-free earnings and withdrawals and no required minimum distributions (RMDs) after you reach a certain age.

Contributions to these plans are nondeductible, so it is important to weigh the future benefits of a Roth against the loss of current deductions. Generally, you are better off with a Roth account if you expect your income tax rate to be higher when you withdraw the funds than when you make the contributions.  It is not unrealistic to think that the government will need to raise tax rates in the future to help pay for the debt incurred to address the COVID-19 pandemic.

When you complete a Roth conversion, the amount converted is fully or partially taxable. If the value of your account has declined this year, you have an opportunity to minimize the tax cost of a conversion. Additionally, that cost may decrease even further if your income this year has put you into a lower tax bracket.

Harvest losses

Tax-loss harvesting simply means selling poor-performing investments to realize capital losses you can offset against capital gains you realized earlier in the year or expect to realize during the remainder of the year. If you end up with a net loss, you can use it to offset up to $3,000 in ordinary income, such as wages or interest.

Harvesting losses can be an effective strategy for reducing your tax bill, but that does not mean you should sell off all your losing investments strictly for tax purposes. Rather, it is an opportunity to rid yourself of investments that are unlikely to bounce back and replace them with investments whose long-term prospects are strong.

Note, if you buy back the same investment or a substantially identical security within 30 days before or after the loss generating investment, it will be subject to wash-sale rules and the loss will be disallowed for tax purposes. 


Diversification is a fundamental principle of sound investing. By investing in a variety of asset classes, funds, companies, industries and geographical regions, you minimize the risk that poor performance in one area will have a material impact on your overall portfolio. Although there are no guarantees, a properly diversified portfolio, which includes assets that tend to perform differently under various market conditions, improves the chances that some investments will perform well as others are stagnant or perform poorly.

Even the most carefully diversified portfolio can get out of balance over time, so it is important to monitor your asset allocation and rebalance your portfolio periodically to ensure the right mix of investments. Doing so can come at a tax cost, however, as you sell some assets and invest the proceeds in others. An economic downturn may create an opportunity to make changes to your portfolio while minimizing the tax cost.

Donate appreciated stock

If you plan to make charitable contributions this year, consider donating appreciated publicly-traded stock that you otherwise planned to sell. Even if a stock’s value has declined this year, it may create capital gains for tax purposes and possibly be subject to net investment income taxes. By donating the stock directly to a qualified charity, you will avoid those taxes while still claiming a charitable deduction equal to the stock’s market value.

Note, this year there are additional considerations. The CARES Act temporarily increased, to 100%, the deduction limit for certain cash contributions. Depending on the specifics, you may be better off selling the stock and donating the cash for tax purposes.

Look at the big picture

Tax planning is important, but it is just one of many factors to examine as you review your investment choices. As you explore the potential strategies, do not lose sight of the big picture: Investment decisions should be based on your overall financial situation and should never be driven by tax considerations alone. Before taking action, talk to your ORBA tax advisor about the right year-end strategies for your specific situation.

Tax Tips: Refund opportunity for excess business losses

The Tax Cuts and Jobs Act (TCJA) limited the ability of noncorporate taxpayers — such as sole proprietors, partnerships and S corporations — to offset business losses against income from other sources. For 2018 through 2025, the TCJA limits deductions of “net business losses” to $250,000 for individuals ($500,000 for married filing joint), adjusted for inflation. Disallowed losses may be carried forward according to net operating loss (NOL) rules.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended these limits for 2018 through 2020, making business losses fully deductible in the year incurred. If your losses were limited on your 2018 or 2019 tax returns, you may have an opportunity to amend those returns for the additional losses.

Extra time to invest in Qualified Opportunity Funds

If you recognized capital gains in late 2019 or early 2020, it is not too late to reinvest those gains in a Qualified Opportunity Fund (QOF). QOFs are funds that invest in one of nearly 9,000 economically distressed Qualified Opportunity Zones designated by the Tax Cuts and Jobs Act. QOF investors enjoy a variety of benefits, including deferral of tax on reinvested gains and permanent reduction of gains on investments that meet certain holding period requirements.

Generally, to qualify for these benefits, you must invest gains in a QOF within 180 days after the sale or exchange of the capital assets. The IRS extends this deadline in Notice 2020-39. If you sold assets for a gain that is eligible for investment in a QOF, and the 180th day would have fallen on or after April 1, 2020 and before December 31, 2020, you now have until December 31, 2020 to invest that gain in a QOF.

Retirement plan elections may be signed remotely

In response to the COVID-19 pandemic and social distancing policies, the IRS issued Notice 2020-42, providing temporary relief from the requirement that certain retirement plan elections, including spousal consents, be signed in the physical presence of a plan representative or notary public. Through the end of 2020, this requirement will be deemed satisfied for elections executed using live audio-video technology, subject to the following:

  • The signer must present a valid photo ID during the conference;
  • Live audio-video system used must allow interaction between signer and plan representative;
  • Singed copy transmitted, by fax or electronic means, directly to plan representative on the same date of signature; and
  • Upon receipt, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with the notice and transmit the signed document and acknowledgment back to the individual under a system that satisfies the applicable notice requirements.

The guidance is intended to facilitate coronavirus-related distributions and plan loans according to the CARES Act. The temporary relief applies to any election that requires a signature in the presence of a plan representative or notary.

For more information, contact Ryan Kertes at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Tax Services.

Forward Thinking