We have written previously stressing the need to have an estate plan, so you do not leave a mess, and why you may need life insurance to protect others. Few people will disagree with the need to have a current plan and to provide for survivors, but not everyone acts.
So, why is it that people fail to take action? Rick Kahler wrote recently about Overcoming Client Procrastination with Financial Planning. In his post, he lists factors that cause people to put off action that agree is important to address:
Avoidance. Feelings of self-doubt, fear of pain or anxiety around the task, depression, fear of asking for help, lack of trust.
Perfectionism. Fear of failure, fear of being criticized (both externally by others and – often more powerfully – internally by parts of yourself).
Ambiguity. Lack of clarity about the task, feeling overwhelmed, difficulty prioritizing in the absence of a crises, being focused on immediate tasks.
Narcissism. Over-confidence in getting it done at the last minute. Needing chaos or pressure to provide adrenaline, the ability to focus to the exclusion of everything else, and a feeling of being fully alive.
Physical Issues. Fatigue, illness.
Lack of knowledge. Not knowing what you don’t know, unsure how to get needed help and information.
Financial. Not having the funds to take the necessary action.
Do any of these apply to you? If so, we can help so please contact us.
Why you should:
One reason to review your estate plan is that the Biden administration may seek changes to the estate and income tax laws; you want to make sure your documents have the flexibility to address these changes. The current federal gift and estate tax credit is close to $12 million. However, it is scheduled to drop to between $5.5 and $6 million in 2025 and the administration may push for a lower credit to be imposed sooner. Also, the administration may try to eliminate the step-up in basis at death. We will continue to monitor any proposed law changes and post updates.
There are other tax law changes to address, such as the elimination of the “stretch IRA.” You may need to revise your beneficiaries. Also, you will want your executor or personal representative to elect portability of your federal credit to minimize taxes and may want your documents to address the generation skipping transfer tax credit.
Another reason to act is to provide for your digital assets, something old documents may not address. For example, you can give your attorney-in-fact under your durable power of attorney access to your digital assets and you can assign your digital assets to your revocable trust so your trustee has access. Digital assets include e-mail and text messages, photographs, videos and other files on your computer, on-line accounts such as your investments and social media, or even intellectual property and patent rights. You may also have collectibles that need to be addressed,
Another reason to act is to ensure that someone knows how to access all your passwords if something happens to you. Create your own “Rosetta Stone,” a document telling them how to access your digital life, with IDs and passwords, and then make sure an immediate family member or close friend knows where to find it. This way, they can locate all your important documents, find assets and insurance, and handle your social media if something happens. You may also want to provide a memorandum to your personal representatives and trustees detailing your wishes, including thoughts on when to distribute to children, protecting from creditors, and even burial or cremation.
If you to take the time now to review and update your plan, be sure:
that you have documents that are in order,
that the documents are correctly executed,
that you provided adequate resources for survivors, including life insurance, and
that your beneficiary designations and asset ownership all coordinate with your documents.
When you do, you will have improved matters for you and your family!
Contact our office if you have any questions or comments. And be well!
Here is a good news release from the IRS site worth reviewing
Important reminders before filing 2020 tax returns
WASHINGTON — Following an unpredictable year with many changes and challenges, the Internal Revenue Service today shared important reminders for taxpayers who are about to file their 2020 federal tax returns.
Choose direct deposit The safest, most accurate and fastest way to get a refund is to electronically file and choose direct deposit. Direct deposit means any tax refund is electronically deposited for free into a taxpayer’s financial account.
Eight out of 10 taxpayers get their refunds by using direct deposit. It is simple, safe and secure. This is the same electronic transfer system used to deposit nearly 98% of all Social Security and Veterans Affairs benefits into millions of accounts.
Earned Income Tax Credit The Earned Income Tax Credit (EITC) can give qualifying workers with low-to-moderate income a substantial financial boost. EITC not only reduces the amount of tax someone owes but may give them a refund even if they don’t owe any taxes or aren’t required to file a return.
People must meet certain requirements and file a federal tax return in order to receive this credit. The EITC assistant on IRS.gov can help people determine if they qualify.
The IRS reminds taxpayers that they may elect to use their 2019 earned income to figure the EITC if their 2019 earned income is more than their 2020 earned income. For details, see Publication 596, Earned Income Credit. Taxpayers also have the option of using their 2019 income to figure the Additional Child Tax Credit for 2020.
Taxable unemployment compensation Millions of Americans received unemployment compensation in 2020, many of them for the first time. This compensation is taxable and must be included as gross income on their tax return.
Taxpayers can elect to have federal taxes withheld from their unemployment benefits or make estimated tax payments, but many do not take these options. In that case, taxes on those benefits will be paid when the 2020 tax return is filed. Taxes can be paid throughout the year. For safe and secure ways to pay taxes electronically go to IRS.gov/payments.
Taxpayers can find more details on taxable unemployment compensation in Tax Topic 418, Unemployment Compensation, or in Publication 525, Taxable and Nontaxable Income, on IRS.gov.
Interest is taxable income Many individual taxpayers who received a refund on their 2019 tax returns also received interest from the IRS. The interest payments were largely the result of the postponed filing deadline of July 15 due to the COVID-19 pandemic.
The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return.
The IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10. The average refund interest amount is $18, but the amount for each taxpayer varies based on the tax refund that the taxpayer received. Form 1099-INT will be issued no later than Feb. 1, 2021.
Home office deduction The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy.
However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. IRS Publication 587, Business Use of Your Home, provides more on the home office deduction.
Workers moving into the gig economy Many people found different employment in 2020, including jobs in the gig economy. Taxpayers must report income earned in the gig economy on their tax return. However, gig-economy workers generally do not have taxes withheld from their pay as salaried workers normally do. The IRS encourages people earning income in the gig economy to consider making quarterly estimated tax payments to stay current with their federal tax obligations.
Charitable donation deduction for people who don’t itemize Individuals who take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.
Before making a donation, the IRS reminds people they can check the special Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.
Under this change, individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2020. This deduction does not apply to donated property. The maximum deduction is $150 for married individuals filing separate returns. More information is available in Publication 526, Charitable Contributions, on IRS.gov.
Disasters such as wildfires, flooding or hurricanes Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Some 2020 tax deadlines in certain counties have been extended into 2021 due to recent wildfires, hurricanes or flooding.
We face a challenging time for planning: The election resulted in a new President while the rate of Covid-19 infections (and deaths) continues to rise. This has affected the economy, resulted in some tax law changes and may yield more stimulus to restore the economy. Also, there may be more changes in 2021. This post is intended to help you make the best tax-efficient moves before 2021 begins.
2020 year-end tax planning – update on using the tax laws to save you money
In 2018, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. This update replaces the third part from December 2018, as updated December in 2019 – it is our guide for year-end moves to reduce total taxes between 2020 and 2021. But, before getting to the planning steps, we address the uncertainty caused by possible tax changes in 2021 and review some recent changes from earlier this year.
Possible Tax Law Changes under Biden
President-Elect Biden campaigned on raising taxes for corporations and for individuals making over $400,000 of income. However, even if the Senate seats in Georgia go to Democrats in January, the lack of a “Blue Wave,” a sweeping Democratic mandate, means that the tax hikes are unlikely to pass. Furthermore, the President-Elect has made clear that controlling Covid-19 and economic recovery are the top priorities of his new administration.
What did President-Elect Biden propose? He would restore the 39.6% bracket for couples making $622,050 or more ($518,400 for singles), add a 12.4% social security tax for income over $400,000, place a 28% limit on itemized deductions for high income taxpayers, restore the 20% long-term capital gains rate for high income returns (and even apply ordinary rates on gains of taxpayers over $1 million), and limit the Qualified Business Income Deduction and opportunity zone credits. For estate taxes, he would reduce the current $11.58 million exemption to a lower amount, perhaps $5 million or even $3.5 million, and eliminate the step-up in basis at death.
While none of these changes are likely, there may be narrow tax hikes to fund infrastructure building and small tax breaks for lower earners (child/dependent care and elderly long-term care credits). There may also be more stimulus action, such as more Paycheck Protection Program loans and business tax breaks for worker safety measures, as well as retirement savings incentives, tax extenders for items expiring this year, and tax breaks to encourage US manufacturing. We will monitor activity on these matters for comment in future posts.
Changes from the SECURE and CARES Acts for 2020
We wrote about the CARES act earlier this year, which waived the 10% penalty for coronavirus-related distributions from qualified plans of up to $100,000, with three years to pay the taxes due or redeposit as a roll-over, and suspension of required minimum distributions (“RMDs”). The act also allows larger plan loans.
The Secure Act delayed RMDs to age 72 and allowed individuals to contribute to IRAs after age 70 ½ if still working. But the Act also limited the distribution of IRAs to a 10-year maximum for beneficiaries other than spouses and certain others, thus eliminating the “stretch IRA.”
The Families First Act created credits for people unable to work due to Covid-19 illness and due to caring for others. If you are affected, check to see if you are eligible for any of these tax credits.
A reminder on the mortgage interest deductions
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary and secondary residences. Interest on home equity loans is not deductible, except when the home equity indebtedness is used to purchase or improve your primary or secondary residence.
Check taxes already paid
Make sure your total paid to the IRS and state via withholdings and estimates meets the safe harbor rules. If not, you could owe interest for under-withholding.
Now to the planning: Can you act at all?
Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the $24,800 standard deduction for married couples (more for over 65 taxpayers, and $12,400 for single taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction). And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (but you can also stop collecting receipts for those deductions).
There is one exception from the CARES Act, which provides a $300 above the line charitable deduction for cash contributions. You get this regardless of itemizing.
Some possible deduction strategies
One technique for getting around the limit on deductions is to bunch certain deductions from two or more years into one year. However, the only deduction that you can easily move is for charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full amount in one year, you can still use this bunching strategy to donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.
The tax planning steps
What can you move? If you are able to itemize, determine what income and deductions you can move from 2020 to 2021 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and a review Roth conversion. Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great – see more at Roth or not to Roth? With the waiver of the 10% penalty for early withdrawals, a Roth conversion may be more attractive. Business owners will want to review our post on planning under 199A for QBID.
What is the effect of moving? Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
The AMT – Finally, watch for the Alternative Minimum Tax (“AMT”). The AMT affects fewer people, but it is still wise to review so you avoid it.
Retirement contributions
If you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year. The contributions reduce your tax able income while adding to savings. But check out our post on paying debts vs. investing.
If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed. The provision was great when you had an RMD to satisfy, but that was suspended for 2020. That should not stop you if you still have the charitable intent.
Business expenses
The deduction of unreimbursed business expenses was terminated by the new tax law. That hurts many who are working from home this year, as they cannot deduct associated costs.
We wrote about forming an LLC or S Corp. to report business expenses or taking expenses on Schedule C in our 2018 Part III post, but that applies to expenses for that business and we stressed that you will need a valid business purpose to form the LLC or S Corp. or use Schedule C for self-employment and take expenses. Be sure to consult with an attorney before trying any of these ideas.
Capital gains
Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2020, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your portfolio while not counting against the wash sale rule). N.B. – when buying mutual funds late in the year, check for distribution dates so you do not purchase just before dividend and capital gains distributions, as you will owe taxes on those distributions.
If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation. That is very effective tax leverage!
Estate plan review
While you review your taxes, review your estate plan as well. The federal exemption is over $11 million in 2020, so fewer people will owe any federal estate tax. However, that may change in 2021; also, many states still impose estate taxes on smaller estates.
The individual gift and estate tax exemption is due to return to $5 million, adjusted for inflation, in 2026 and could be lowered sooner, as noted above. That tax rate could also go up.
If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education cost – expanded to provide for more than just college – or an ABLE account for disabled dependents. Note, however, that holding appreciated assets for the step up in basis at death may be better than gifting, but this could be eliminated as noted above.
If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.
Summary
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2020 and 2021.
Good luck and best wishes for happy and healthy holidays!
Last year, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. In this part, we update the third part posted last year, which is our guide for year-end moves to reduce total taxes between 2019 and 2020.
Can you act at
all?
Each year we advise that you be practical, focusing on where
you can actually take action.
For many, the new $24,000 standard deduction for married
couples, $12,000 for single taxpayers, means you will not itemize (i.e., your
total for itemized deductions is less than the standard amount so you take the
higher, standard deduction). The
standard deduction goes up when you reach 65.
If you are not itemizing, you have fewer ways in which to
affect change in the taxes due in either year (but you can also stop collecting
receipts for those deductions!).
Some possible
deduction strategies
One technique for getting around the limit is to bunch
deductions from two or more years into one year. The one deduction that you can easily move is
for charitable donations. Your state,
local and real estate taxes are limited to a $10,000 maximum and you cannot
accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full
amount in a single year, you can still use this bunching strategy. Donate to a donor advised fund, from which
you may be able to designate donations to particular charities in future years.
IRA donations: If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed.
Capital Gains: Review your portfolio. You may be able to “harvest losses” to offset capital gains realized on stock sales or mutual fund capital gains distributions. If you have substantial unrealized gains, consider donating to a charity. See below.
The tax planning
steps
If you are able to itemize, determine what income and deductions you can move from 2019 to 2020 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions (Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great). And business owners will want to review our post on planning under 199A for QBID.
Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
But, watch for the Alternative Minimum Tax (“AMT”):
The exemption for the AMT and the threshold
above which that exemption gets phased out are now higher than before 2018, so fewer
taxpayers will owe the AMT.
Finally, if you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year.
Capital gains
Your mutual funds may have large capital gains distributions. Christine Benz says, “Brace yourself: 2019 is apt to be another not-so-happy capital gains distribution season, with many growth-oriented mutual funds dishing out sizable payouts.”
Review
your unrealized losses to see if you can “harvest” those losses to offset or “shelter”
realized gains, reducing your total taxable income. If you have more losses than gains, you can
take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2019, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your asset allocation while not counting against the wash sale rule).
If you have significant unrealized gains, consider using
appreciated stock for charitable donations – that way you avoid the tax on the
gain while still getting the full fair market value for your charitable
donation.
Some reminders on itemized
deductions
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase or improve your primary or secondary residence. Interest on home equity loans will not be deductible, except when the home equity indebtedness is used to purchase or improve the residence.
Also, all miscellaneous deductions were eliminated. This includes investment and tax preparation
fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed
(except for military personnel in certain cases).
Check taxes paid
Make sure your total paid in withholdings and estimates
meets the safe harbor rules. If not, you
could owe interest for under-withholding.
Estate plan review
While you review your taxes, consider reviewing your estate plan and your beneficiary designations. The federal exemption is just over $11 million in 2019, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education costs – expanded to provide for more than just college.
Note, however, that holding appreciated assets for the step up in basis at death may be better for your heirs than gifting.
Check on 2018
Check to see if you over-paid a penalty for
under-withholding. If you filed early,
the penalty calculation may have over-stated the total you owe, so you will
want to review your 2018 filing.
Summary
Carefully review any income and deductions that you can
still shift to see if moving will lessen the total taxes you pay for 2019 and 2020.
The Tax Cut and Jobs Act brought the most significant changes to our income taxes in the last thirty years. We continue to assess its impact in this post, which provides updates and some strategies for items discussed at the end of 2018 in these three posts:
As a quick summary of the posts, in the first post, we discussed the impact of the new law on personal taxes; in the second post, we discussed planning for small businesses; and in our third post, we provided a practical guide for year-end action.
Itemized deduction strategies
As we noted in these tax planning posts, far fewer US Taxpayers will itemize because of the increased $24,000 standard deduction for married couples ($12,000 for individuals). One estimate is that the number will be about 6% of all taxpayers for 2018, down from over 30% in prior years.
Bunching your itemized deductions
into a single year is one way to push your total above the standard deduction amount,
and thus restore the tax deduction benefit for such items as charitable
donations. We discussed bunching and
giving to donor advised funds in our third
post. As we noted then,
charitable donations are the easiest Schedule A items to which to apply
bunching.
Miscellaneous deductions are gone; Or are they?
Now that the miscellaneous
itemized deductions are gone, can you do anything with tax prep and investment
fees?
Take tax prep fees on other schedules
For the tax preparation fees, you can deduct those amounts on Schedule C, Schedule E (page 1), or Schedule F. And, if you have K-1s, input the fees as unreimbursed expenses so that the fees flow to Schedule E (page 2).
Capitalize investment fees
As for investment fees, there is support for capitalizing these costs, but the support is not dispositive. This interpretation of the Treasury regulations is that you can capitalize the cost of evaluating the value of stocks purchased and sold. You would need to elect to capitalize the related fee for each transaction, so this could be a great deal of work, depending on the amount of fees and number of stocks purchased or sold in a given year. Taking this approach seems fair, as the treatment parallels treatment of fees in mutual fund, where the advisory fees are netted out before capital gain and dividend distributions to shareholders.
Notes: First, that there is a Treasury memorandum that says you cannot add carrying costs to basis. Second, even if you could, capitalizing takes a great deal of work so it may not be worth the effort.
Kiddie tax
The first $1,050 of unearned income for children who are dependents is not taxed in 2018. Amounts above that level are taxed at the same rate as trusts and estates. Those brackets are quite compressed compared to individual brackets. Nonetheless, a child of a parent in the 37% tax bracket can still have $12,500 of income taxed at a lower rate. That could save taxes on college funds (but compare to sheltering in a 529 plan).
Child tax credit
The $2,000 child credit phases out at much higher adjusted income levels for 2018: over $400,000 for married couples, $200,000 for single taxpayers. If your child is age 17 or over, you lose the $2,000 credit, but you may qualify for the $500 dependent credit. This credit could not only applies to college students, it covers disabled children, elderly parents and other family that are your dependents.
QBID for rental real estate
The IRS regulations provide a
safe harbor for people who spend 250 or more hours a year on activities related
to their rental properties. You will
need to keep records of your time and maintain separate bank accounts for the
activities.
Enterprise Zone rollovers
You can roll over gain from stock or other capital assets to investments in an enterprise zone, delaying tax on the gain, and even eliminating tax on a portion. We will post more on this at a future date.
Estate taxes
With the doubling of the federal gift and estate tax credit, few estates will be subject to federal estate tax. This means that gifting is not nearly as important as retaining low basis assets for the step at death. By this we mean that keeping assets in your name results in those assets are treated as having basis equal to the fair market value at death, so your heirs only pay tax on any gain that occurs after your death.
Conclusion
There have been many changes to our tax law, so if you are not sure how you are affected, contact me for some planning. Maybe we can help you save on taxes!
