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As the end of 2020 approaches, TWG Tax Attorney Matt Schippers* notes the following year-end considerations for 2020 tax planning:
COVID-19 Tax Law Changes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted in response to the COVID-19 pandemic. The CARES Act included the following noteworthy tax provisions: Economic Impact Payments. The CARES Act provided economic impact payments, in the amount of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child, to eligible individuals. The payments were subject to phase outs at certain income levels. For income tax purposes, the payments will be treated as advance refunds of a 2020 income tax credit. On their 2020 tax return, taxpayers will reduce the amount of the credit available by the amount of the advance refund payment. Accordingly, individuals may claim the difference as a credit against tax due on their 2020 return.
Retirement Plan Distributions
The CARES Act allows taxpayers to take up to $100,000 in coronavirus-related distributions through December 31, 2020 from retirement plans without being subject to the 10% early distribution tax. The distributions may be repaid to the taxpayer’s retirement plan within three years. Eligible taxpayers are those who have been diagnosed with COVID-19, including spouses and dependents who have been diagnosed; or those who experience proscribed adverse financial consequences due to the pandemic. Further, the CARES Act also temporarily suspended the required minimum distribution rules for 2020. Excess Business Loss Limitation. As part of the CARES Act, Congress repealed the excess loss limitation. This limitation previously disallowed excess business losses of non-corporate taxpayers if the loss amount exceeded $250,000 ($500,000 for married filing jointly taxpayers).
Charitable Deductions
The CARES Act offered two provisions related to charitable giving. First, taxpayers who do not itemize, and who therefore claim the standard deduction in 2020, may claim an above-the-line charitable deduction of up to $300 in determining adjusted gross income (“AGI”). In prior tax years, taxpayers could deduct charitable contributions only if they itemized deductions from AGI. Second, for taxpayers who itemize, the CARES Act increased the charitable deduction AGI limit to 100% of AGI for cash contributions made to public charities in 2020. For 2019, this AGI limit was 60%.
For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for married filing jointly taxpayers. Taxpayers are able to claim the greater of the standard deduction or of their itemized deductions. Itemized deductions include items such as medical expenses, home mortgage interest, state and local taxes, and charitable contributions.
Retirement Account Contribution Limits
The 2020 limits for retirement account contributions are $19,500 for a 401(k) and $6,000 for an IRA. Taxpayers who are 50 years of age and older may make catch-up contributions of $6,500 to a 401(k) and $1,000 to an IRA. IRA contributions are subject to certain phase out limitations.
Estate and Gift Tax
The estate and gift tax exemption is $11.58 million for estates of decedents dying in 2020. The exemption is set to increase to $11.7 million in 2021 due to inflation. If a decedent’s gross estate and adjusted taxable gifts exceed the exemption, an estate tax return (Form 706) will be required to be filed by the decedent’s executor or personal representative. For 2020 and 2021, the annual gift tax exclusion is $15,000 per year per donee and is $30,000 if the donor is married and elects to split gifts with his or her spouse. Any gift to a donee in excess of $15,000 made by an individual taxpayer will require the filing of a gift tax return (Form 709) and will reduce that taxpayer’s estate and gift tax exemption.
Attorney Matt Schippers received his LL.M. in Taxation from New York University School of Law in 2017 and was recently accepted into Class II of the Heart of America Fellows Institute created by ACTEC Fellows to develop the profession’s future leaders in trust and estate law. This summary should not be considered legal advice. For specific questions about tax planning, contact the Tax Attorneys of TWG.
