November 16, 2020
Must-Know Year-End Tax Planning Considerations for 2020
Everyone will agree that 2020 has been one of the most unusual years we have ever experienced. Many are relieved that the year is quickly coming to a close. With Joe Biden winning the Presidential election, year-end tax planning has become more important than ever.
There will be no changes to the tax code by year end, but there may be significant tax law adjustments as soon as 2021. At present, there is much uncertainly about which party will control the Senate, and without control of the Senate, it may be difficult for Biden to enact his tax plan. We can predict, however, that income taxes are likely to increase at some point in the near future as a result of the rising deficit, in part due to government spending to combat COVID-19 via the CARES Act and SECURE Act.
In order to take advantage of the opportunities presently available to you, please consider the following current and projected tax guidance:
Income Acceleration: Biden’s campaign proposals increase the top tax rate to 39.6% from the current rate of 37%. This increase would occur for individuals with income over $400,000. Given the expectation that tax rates may increase in the future, it may make sense to accelerate ordinary income into 2020 where possible.
Capital Gains/Qualified Dividends Income Acceleration: Biden’s plan would also increase preferential capital gains rates from 20% to 39.6% for taxpayers with income over $1,000,000. In years past, you might have elected to defer gains, but for 2020, you may want to consider harvesting gains where sensible for your portfolio.
Gifting to Heirs Acceleration: For 2020, the annual gift tax exclusion is $15,000, the same as it was in 2019. However, the lifetime giving exemption has increased from $11,400,000 to $11,580,000. It will continue to be adjusted for inflation each year. Under Biden’s proposed plan, the lifetime exemption would be reduced to $3,500,000 and the gift/estate tax rate increased to 45%. It may make sense to accelerate any gifting in 2020 to take advantage of the present exclusions, which are significantly higher. Even if Biden does not reduce this amount as part of his plan, the current exemption is still set to sunset on December 31, 2025 and revert to $5,000,000.
Standard Deduction/Eliminated Personal Exemptions: The standard deduction will remain at $12,400 for individuals and $24,800 for married couples who file jointly.
General Charitable Contributions:Donations made to charitable organizations are still deductible if taxpayers itemize their deductions. For 2020, non-itemizing taxpayers can claim an above the line deduction up to $300. With the increase in the standard deduction to $24,800 per year and limiting of the state tax deduction to $10,000 per year, fewer people are itemizing. If you are not itemizing, or if your deductions slightly exceed the standard deduction, you may want to consider grouping your charitable gifting in one year. For example, if you typically gift $5,000 per year, we may encourage you to prefund future gifts for two or three years. This would allow you to receive an increased benefit for charitable contributions. Gifting cash now will provide you with a deduction up to 100% of your adjusted gross income. To reach the 100% limit, gift stock and/or cash to Public Charities. Please note that this does not apply to donor advised funds or private foundations.
Charitable Contributions of Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit: you may deduct charitable donations for the fair market value of the donated assets without paying capital gains taxes, and you are eligible to deduct up to 30% of your adjusted gross income using appreciated assets to a public charity.
State and Local Tax (SALT) Deductions Capped: Combined state income taxes and property taxes are currently capped at $10,000 per year. In prior years, there might have been a benefit in prepaying state and/or property taxes by December 31st; however, with the new limits, any benefit is highly unlikely. Biden’s plan may move to increase the deductibility of state and local taxes.
Itemized Deductions: Under the Biden plan, although he would like to increase SALT deductions, he would move to cap the tax benefit of all itemized deduction at 28% of income for those earning more than $400,000 per year. With this in mind, consider generating and claiming more deductions in 2020 to maintain a higher tax benefit. For example, prefunding charitable gifts to a donor advised fund may make sense this year to maintain a higher tax benefit.
IRA Funds: The CARES Act allows taxpayers to elect not to take their required minimum distribution (RMD) for 2020. In addition, The SECURE Act allows taxpayers of any age to make a contribution to a traditional IRA if they have earned income. Separately, you may want to consider a ROTH IRA Rollover in 2020 as a way to accelerate income.
Mortgage Interest Deduction: Taxpayers looking to purchase new homes may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered”, interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment if the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Certain loans where proceeds were used for investing purposes may also be deductible as investment interest expense.
Qualified Small Business Stock (QSBS): Gain on the sale of Qualified Small Business Stock that is held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100% depending on your date of purchase.
20% Passthrough Deduction: Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, may be limited.
Stock Options: If you own options with fast approaching expirations dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. When to exercise options is a matter of personal preference contingent upon your own beliefs about the future potential of the stock. However, we must caution that there are major tax implications to consider when exercising. We strongly recommend seeking our advice before exercising options.
Business Update For Bonus Depreciation: As a reminder, the Tax Cuts and Jobs Act (TCJA) allows full and immediate expensing of 100% of the cost of qualified property acquired and placed in service during the period between September 27, 2017 and January 1, 2023. Additionally, bonus depreciation is available for both new and used qualified property.
Income & Wealth Taxes – California bill AB 1253 was the source of much debate earlier this year. This state bill proposed a large tax increase on taxpayers with income greater than $5M. AB 2088 was also introduced during the legislative session and proposed a wealth tax of 0.4% for California residents with net worth above $30 million. Neither bill passed during the 2020 legislative session. However, authors of the bills plan to re-introduce them at the next legislative session in 2021.
Property Taxes – Proposition 19 has passed, pending state certification. Prior law stated that parents could transfer their personal residence to their children via sale or gift without triggering any property tax reassessment, and transfers of other property were exempted from reassessment to the extent of $1 million of assessed value. Proposition 19 will result in the reassessment of property tax on properties not used as primary residences by taxpayers’ children. For primary residences, if the value of the property at the time of transfer exceeds the parent’s assessed value by $1M or more, then the child’s assessed value is the current value of the property less $1 million. These changes are effective February 15, 2021. Parents may want to consider gifts of real property before the effective date to maintain the parent/child exclusion property tax benefit.
We are prepared to strategize to help you reap any benefits still allowed by the latest tax reforms. We would be happy to discuss any questions that you may have about minimizing your taxes and maximizing any benefits with actions you can take now, in 2020. Please contact us for specific advice regarding your individual tax planning needs.
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