2020 Year-End Tax Planning
Overcoming Financial Uncertainty
2020 has been a challenging year for Americans, mentally, physically and financially. It will likely go down in history as “the year of uncertainty.” Even as we write this article, much remains unknown concerning the county’s physical heath and the future balance of power in our legislature. Such uncertainty makes traditional year-end tax planning difficult.
However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act have provided taxpayers with several opportunities. We have highlighted a few of these changes and recommend taxpayers discuss their options with their tax advisor.
Taxpayers who claim the standard deduction for 2020 will be allowed to claim an “above-the-line” deduction of $300 for cash donations made to public charities.
For those who itemize in 2020, they will be entitled to deduct qualified contributions of up to 100% of their Adjusted Gross Income (AGI). This is an increase from the 60% limitation for cash gifts to public charities. Contributions that exceed the 100% AGI limitation can be carried forward.
Donations eligible for the 100% AGI limitation must be:
1. Cash contribution
2. Donated to public charity
3. Made during the 2020 calendar year.
Many taxpayers may want to take advantage of this relief and increase their giving to offset taxable income for 2020. It is important to remember that non-cash contributions and donations to any non-public charity (including a donoradvised fund) would be subject to the various AGI limits.
The CARES Act waived any required minimum distributions (RMDs) in 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. If you have not yet taken your RMD for 2020 and you do not need the distribution, forgoing your 2020 RMD could be an excellent move to lower your 2020 taxable income.
The SECURE Act changed the age for RMDs from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949.
The SECURE Act also removed the age restriction for contributing to a traditional IRA. Before this Act, taxpayers over the age of 70½ could not make deductible contributions to their retirement plans.
If a taxpayer’s taxable income for 2020 is expected to be lower than usual, it could be a great time to consider converting a traditional IRA into a ROTH IRA. Low tax rates, stock market volatility, and overall estate planning for heirs are all reasons a taxpayer may wish to consider a ROTH IRA Conversion before year-end.
Currently, the unified estate and gift tax exclusion and generation-skipping transfer tax exemption for 2020 is $11,580,000 per person ($23,160,000 for those Married Filing Joint).
Given the current budgetary deficits, there is a possibility that the lifetime exclusion may be reduced to $5,000,000 per person (adjusted for inflation) earlier than the 2025 “sunset” of this provision.
Taxpayers should carefully look at their estate plan with their advisor. It may be wise to take advantage of the current lifetime exemption by making significant gifts or taking other actions prior to year-end.
Long Term Capital Gains Rates
Currently, the maximum federal capital gains (and qualified dividends) tax rate is 20% (plus 3.8% net investment income tax, if applicable).
It is projected that these rates will likely increase under a new administration for those taxpayers with income above $1,000,000.
For those taxpayers who may be impacted, it may be worthwhile to consider any year-end transactions that would take advantage of the current rates.
Net Operating Losses
The CARES Act temporarily reinstated the net operating loss (NOL) carryback rules. Taxpayers with losses incurred in taxable years 2018 through 2020 are entitled to carry those losses back five taxable years without limitation.
Prior to this change, the Tax Cuts and Jobs Act disallowed any NOL carryback. NOLs were only allowed to be carried forward and limited to 80% of taxable income.
Given that 2020 has been a challenging financial year for many businesses, the ability to apply losses against a prior year’s taxable income could result in significant refunds.
As we close the chapter to 2020 and look ahead toward 2021, we can probably all agree there are likely to be significant changes to the tax landscape in the foreseeable future. We recommend taxpayers contact their tax advisor before year-end. Every taxpayer’s situation is different and requires a thorough review and discussion before any year-end plan is implemented.
Contribution by Mark Dupeé, CPA, tax manager; and Elizabeth Killough, CPA and tax director. Both are representatives of Heard, McElroy & Vestal LLC, 333 Texas Street, Suite 1525, Shreveport, LA. 318-429-1525.