As the end of 2020 approaches, we can all agree that this year is unlike any other. The coronavirus pandemic and natural disasters have had a significant impact on the tax situation for many taxpayers. In response to the health and economic impact of the coronavirus pandemic, Congress passed two major pieces of legislation – the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. More relief may be forthcoming. In addition, we might expect future tax law changes following the election. As such, each individual taxpayer should consider the unique challenges and opportunities that this year presents.
Economic Impact Payment
If an individual missed the extension for non-filers, the credit may be taken on the 2020 Form 1040 for the full amount to which they are entitled. Taxpayers who received more than the amount to which they are entitled do not have to repay it unless they were not eligible to receive it in the first place, e.g. deceased individuals or non-resident aliens. A person claimed as a dependent in 2018 or 2019 may also be entitled to the refundable credit if they are not claimed as a dependent in 2020 even though their parent received the $500 credit for the earlier year.
The CARES Act allows penalty free distributions made during the 2020 calendar year of up to $100,000 for COVID-related expenses. Any income attributable to an early withdrawal is subject to tax over a three-year period, and taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.
There is a temporary waiver of required minimum distributions for the 2020 calendar year. However, because of recent changes to retirement accounts, such as the increased age to begin RMDs, the end to the 70 ½ age limit for contributions to an IRA, and the shortened distribution period for non-spouse inherited IRAs, taxpayers are encouraged to review strategies for continuing to make IRA contributions and to reevaluate their beneficiary designations.
For the 85% of taxpayers who do not itemize, a $300 above-the-line deduction for cash contributions is available for 2020. However, the law is unclear if the $300 amount applies for both individual and joint returns or whether it is available beyond 2020.
For 2020 only, the limit for itemized charitable deductions is increased from 60% to 100% of adjusted gross income for all cash donations. It does not apply to donations of appreciated securities.
Although the CARES Act eliminated the required minimum distribution for 2020, taxpayers over age 70 ½ may still make a direct contribution to a charity from their IRA of up to $100,000 in 2020 and thereby reduce their adjusted gross income.
If you hire people to work in your home in 2020, you are required to withhold and pay FICA taxes if cash wages paid during the year total $2,200 or more. There is one limited FICA exception for wages paid to household workers who are under 18 (the so-called baby-sitter exception). Social security and Medicare tax does not apply at all to these workers if domestic work is not their principal occupation.
Annual exclusion amount
The first $15,000 of gifts made by a donor to each donee during the 2020 tax year is excluded from the total amount of the donor’s taxable gifts for that year. Although a lifetime exclusion amount is also available to shelter gifts from current gift tax, gifts given under that provision may reduce the amount that can ultimately pass to your heirs estate-tax free.
Additional COVID Relief
In addition to providing resources to the health community to help contain and combat the virus, the Families First Coronavirus Response Act offered employees and self-employed individuals affected by the pandemic with guaranteed paid sick leave. Provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act also included numerous tax benefits for businesses. Here are highlights for tax planning consideration at 2020 year-end.
- The Paycheck Protection Program (PPP). Under the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on a PPP loan in an amount equal to the sum of payments made for qualified expenses. According to IRS guidance, the business expenses related to forgivable PPP loans are not deductible. However, lawmakers state that this was not their intent. Congress will need to address the deductibility of these expenses in future legislation to clearly make these expenses deductible.
- Executive Memorandum on Withholding. President Trump has authorized employers to defer the withholding of the employee’s share of Social Security taxes through the end of 2020. However, unless Congress forgives the repayment of these taxes, they will have to be repaid in the first quarter of 2021. It is unclear as to how the deferred tax would be collected from individuals who are no longer employed when the taxes come due. Employers that are concerned with the administration and collection of the deferred taxes continue to withhold the taxes from their employees.
Year-end planning should start with data collection and a review of prior year returns. This includes information on losses or other carryovers, estimated tax installments, and items that were unusual. Conversations regarding next year should include discussions of any plans for significant purchases or dispositions, as well as any possible life cycle events.
The biggest variables for many taxpayers impacting their year-end tax planning surrounds life events such as marriage, divorce, birth or adoption of a child, a new job or the loss of a job, and retirement. These life events may, for instance, result in a change in filing status that will affect tax liability. The possibility of significant changes and/or significant or unusual items of income or loss should also be part of a year-end tax strategy. Additionally, taxpayers need to take a look into the future and predict, if possible, any events that could trigger significant income, losses, or deductions.
Year-End Gifting and Account Request Deadlines
Please note that all charitable gift requests need to be submitted to TD Ameritrade by December 18, 2020. All other time-sensitive requests need to be processed by December 21, 2020 to ensure transactions are made prior to the December 31st year-end tax deadline.
Because of the retroactive changes to tax rules, the possibility of more changes after the election and with the continuing challenge of the pandemic, there is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically considering the changing landscape. Please call our office to schedule an appointment to discuss your year-end strategy.