Federal and state governments face sizable budget deficits due to the COVID-19 pandemic and a rocky political climate. With restrictions still in place as the pandemic continues to spread in the U.S., states are coming up short on two valuable revenue sources: income taxes and sales taxes.
In addition to state deficits, the total U.S national debt was $26 trillion as of July 25, 20201 and federal taxes may rise to pay back the money spent in stimulus aid.
And taxes aren’t all that is impacting– the price of necessities are increasing, particularly gas and food. Gas is recovering from early 2020 declines, and food prices—particularly meat— have proliferated rapidly amid COVID-19 outbreaks at processing plants.
No matter how far off retirement is, keep these three tax and income strategies in mind to deal with taxes and inflation:
1. Convert your traditional IRA to a Roth IRA
Converting your traditional IRA to a Roth IRA before the Dec. 31, 2020 deadline will help you stay within a desirable tax bracket. After this year, taxes could rise, so it may be an excellent time to take advantage of reduced share prices and pay the taxes now. The account will grow tax-free after the conversion.
The added benefit of converting to a Roth is that inheritance from the account can continue to grow for ten years before distribution is required. This benefit is a bonus for beneficiaries who will not have to pay taxes on the income they inherit through the account.
2. Use permanent life insurance for retirement income
If you are retired, consider using permanent life insurance for income in an unfavorable tax environment. Withdrawals from the cash value of a permanent policy are tax-free and can help you avoid withdrawing income from taxable accounts such as 401(k)s and traditional IRAs.
3. Donate to charity before the end of 2020
Depending on the results of the presidential election, 2020 may be the last year that qualified charitable contributions up to 100% of adjusted gross income (AGI) are deductible. If this is the case, investors should consider two methods for charitable donations:
- Make a sizable contribution to a donor-advised fund or foundation and deduct the full amount on 2020 taxes.
- Make a qualified charitable contribution from a traditional IRA (up to $100,00) if you need to take required minimum distributions.
Are you concerned about taxes and inflation in the future? Talk to your financial professional about smart tax moves you can make today to help reduce your tax bill and preserve your investments’ value.
1 TreasuryDirect.gov. “The Debt to the Penny and Who Holds It.” Accessed July 25, 2020.