The passing of key legislation over the past couple of years — particularly the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 — has resulted in significant changes for individuals when it comes to tax planning strategies related to:
Additionally, the Tax Cuts and Jobs Act (TCJA) of 2017 continues to be a factor in planning for individuals’ tax return filings, namely as it relates to the:
Although the TCJA eliminated some of the year-end tax strategies accountants traditionally discussed with clients, in the end, the SECURE and CARES Acts have still left a number of opportunities individual taxpayers can look forward to and maximize at the end of 2020. Below are our top 10 you may want to consider implementing this year.
Maximizing your retirement contributions allows you to contribute dollars pre-tax, lowering your overall taxable income. Take advantage of this opportunity as much as possible using this year’s new limits:
Another planning opportunity is a ROTH conversion. This allows you to convert a traditional IRA to a ROTH IRA and pay the tax on your retirement income now instead of when it is withdrawn. It could potentially provide the highest tax benefit for a couple reasons:
Due to the tax law changes provided in the SECURE Act, if you have reached age 70 on July 1, 2019, or later, you are not required to withdraw your required minimum distributions (RMDs) from your IRA until age 72. In addition, individuals with traditional and ROTH IRAs can continue to make regular contributions to their plans since the 70 ½ age limit has been removed. Finally, the SECURE Act has placed a 10-year distribution time limit on those accounts inherited from a deceased IRA owner.
The CARES Act also provided some additional guidelines for retirement plans that apply to tax year 2020 only.
Read “6 Ways SECURE May Impact Your Retirement and Estate Plans”
For Health Savings Accounts (HSAs), the 2020 annual contribution for a family has increased to $7,100 ($3,550 for individual). If you are 55 or older you can make a catch-up contribution of an additional $1,000. If you have a flexible spending account, monitor the balance in your account so you do not lose unused funds by the end of the plan year.
The CARES Act increased the limitation on cash charitable contributions for 2020, from 60% of the adjusted gross income (AGI) to 100%. Any contributions over 100% of your AGI will be carried forward for use in a future year. Non-cash contributions made in 2020 will not qualify but can be claimed under the normal limits.
If you only itemize because you make charitable contributions, you may want to analyze your tax situation to determine if you should set up a donor advised fund, which would allow you to make a large, single-year contribution and maximize your tax deductions. This strategy allows you to “bunch” your contributions into one year, giving you the benefit of itemizing in that year and taking the standard deduction in the others. This would also be beneficial if you would like to take advantage of the CARES Act 100% cash deduction, but you do not know to which charities you would like to donate. You can donate the cash into a donor advised fund and receive the charitable deduction, then use the funds to donate to a charity at a later time.
If you are age 70 ½ or older and have traditional IRAs, consider making charitable donations directly from your IRA. Even though you may not have taken the RMD due to the CARES Act changes, you can still make a charitable contribution from your IRA. These donations are not included as an itemized deduction, but they are not included in your gross income either. It may be more beneficial to do this now since you will be depleting your IRA balance before tax rates potentially increase.
For those taxpayers who take the standard deduction, there is a $300 “above-the-line” deduction allowed for tax years beginning in 2020 as a result of the CARES Act.
If you are expecting a large capital gain in the current year, analyze your specific tax situation to determine the best course of action. You may want to:
As with previous years, reducing NII is important to lowering the related NII tax. Consider, where possible:
Business owners (individuals, estates and trusts) of partnerships, S Corporations and sole proprietorships can take a maximum deduction of 20% of qualified business income. However, wage limitations apply, and if you are an owner of a specified service business, you are not eligible for the deduction if your taxable income exceeds a certain threshold. To qualify without limitation, owners may want to consider reducing their income to fall below the $163,300 phase-out threshold for individuals ($326,600 married filing jointly).
Read “IRS Finalizes Qualified Business Income Deduction Regs & Provides Guidance”
The SECURE Act repealed the TCJA kiddie tax rules. Starting in tax year 2020, the kiddie tax reverts to pre-TCJA rules, in which children with unearned income of more than $2,200 will be taxed at their parents’ marginal tax rate. This applies for all children who do not file a joint return and have at least one living parent at the end of the tax year. If children only have interest and dividend income of $11,000 or less, the parent may be able to elect to include that income on their return rather than filing a child’s return.
Additionally, the child tax credit remains $2,000 per qualifying child, and taxpayers filing jointly who have up to $400,000 of adjusted gross income are eligible.
The gift and estate tax and exemptions have been increased for inflation in 2020 to $11.58 million for individuals and $23.16 million for married filing jointly. Many taxpayers are no longer subject to the federal estate tax until at least 2026. Here are some items to consider:
The Qualified Opportunity (QO) Zone program, created by the TCJA, incentivizes long-term investment in low income and economically distressed communities by deferring capital gains tax when taxpayers invest those gains into QO Funds. A taxpayer with realized capital gains from an unrelated party has 180 days to invest in a QO Fund (read “Treasury Offers Opportunity Zone Participants Pandemic Relief in Notice 2020-39” for information on the extension of this period as part of the COVID-19 relief effort). An investor can defer their gain until whichever event occurs first: 1) the sale of the QO Fund interest, 2) the QO Fund ceases to qualify or 3) December 31, 2026. The original deferred gain is reduced based on how long the QO Zone Fund interest is held, and post-acquisition appreciation on the QO Fund interest is permanently excluded from tax if the QO Fund interest is held for 10 years or longer. As always, it is important to evaluate any investment carefully and discuss with your investment and tax advisers.
If you claimed unemployment in 2020, it’s important to determine how the payments are taxed both federally and by your state. For those who received unemployment as a result of the pandemic, the payments will be federally taxable and must be included in your gross income. In addition to the payments received from the state, under the CARES Act the federal government added an additional $600 per week until July 25, 2020, and an additional $300 per week for six weeks starting August 1. These two amounts combined may add up quickly, so make sure you are covered with respect to additional tax liability. In many cases you may not have had withholding taken out of your payments, so consult your tax adviser to see if a quarterly estimated payment is necessary — to avoid a tax bill surprise when filing in April.
As only time will tell if the final results of our presidential and congressional elections could bring additional tax uncertainty in the near future, it’s important to work with your advisers now to take advantage of some of these simple yet effective strategies before December 31, 2020.
Contact Laura Sefcik, Nicki Rococi or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.