Important Tax Questions to Ask Your Advisor for 2020

Written By: Scott Meyer

While tax season can prompt many questions related to tax code specifics or the filing process, it can also present opportunities on the financial planning front. According to Scott Meyer one of our Advisors here at Merit, “Many basic tax questions, such as ‘should I take the standard deduction or the itemized deduction?’ will likely be answered by your accountant or tax planning software. However, there are questions you can ask your financial advisor that can help to optimize your financial plan for tax purposes.” 

Here are a few to consider:

Are there tax-loss harvesting opportunities in my non-retirement accounts?

There can be a silver lining to having a poor-performing investment in your non-retirement account portfolio. You may be able to ‘harvest’ these investment losses by selling the position and realizing the capital loss. This capital loss can then be used to offset realized capital gains and/or income. This can be a great opportunity to help reduce taxes while also repositioning an underperforming investment.

Does it make sense for me to make contributions to an IRA or an HSA?

The IRS has extended the deadline to make contributions to your individual retirement account (IRA) and health savings account (HSA) from April 15 to May 17, 2021. This means that any contributions made by May 17 would count as a deduction on your 2020 tax return. So if you are not maxing out these tax-deductible contributions, ask your advisor if it makes sense to do so.

What should I do with my after-tax dollars?

High-income earners who are maxing out contributions to their 401(k)s or IRAs may still have after-tax dollars. As tax rates could rise significantly under the new administration, you may want to consider contributing to a Roth IRA, which allows you to withdraw money tax-free. If your income is too high to contribute directly to a Roth IRA, you could use a strategy called a “backdoor Roth IRA.” This strategy allows you to contribute indirectly to a Roth IRA. Another option is cash value life insurance, which can also be accessed tax-free in the future. Your advisor can help you decide the best way to invest your after-tax funds.

Can I qualify for Obamacare?

This question is particularly relevant for individuals who are retired and no longer on a group health insurance plan but are not yet 65 and eligible for Medicare. These individuals have a window of time where they need to find alternate health coverage. You may not know that Obamacare can be leveraged in these cases by high-net-worth individuals. Whether you qualify for the premium subsidies on Obamacare is determined by your taxable income. If you’re deriving your income from your investment accounts (retirement or non-retirement accounts), ask your advisor if there is a way to structure distributions from your portfolio to qualify for the premium subsidies. This can be done through harvesting capital losses to offset capital gains or holding off on taking distributions from your retirement accounts.

Should I opt out of the advanced payment for the child tax credit?

Looking ahead to the 2021 tax year, the American Rescue Plan modifies the child tax credit. The legislation sets the tax credit for any child under six years old at $3,600 and the credit for any child six to 17 years old at $3,000. The IRS plans to pay half of the credit in advance over the last half of 2021. If you think that you might owe taxes for 2021, you may prefer to opt-out of the advanced payment and instead have the tax credit applied to reduce your 2021 tax liability. Ensuring your financial plan keeps taxes in mind is key. This point is underscored by recent legislation and deadline extensions. Checking in with a financial advisor can help in determining the best course of action. We work one-on-one with clients, not only building personal, trusted relationships but promoting understanding of your personal financial picture. Contact our team to learn how our financial advisors can answer your questions or read our guide to tax efficiency.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended as authoritative guidance or tax advice. You should consult with your tax advisor for guidance on your specific situation.