Top Gifting and Tax Considerations to Know Now

Simple Tax Considerations for 2020-2021

| Paul Fain, CFP®  and Joe Ottaviano, CFP®, CKA®

 

TAX CHANGES IN 2021? Maybe.

One of the possible implications of a change in the White House is tax regulations. Americans, blue or red, are asking the same question: are my taxes going to change?

Joe Biden’s victory could spell changes in income, payroll, estate, and capital-gains taxes but the fate of Mr. Biden’s tax plan won’t be clear until after the January Senate runoff elections in Georgia. Here are some of the proposals in the Biden/Harris platform:

Top Tax Rate on Ordinary Income

Biden has proposed raising one of the existing seven tax rates: the top rate of 37%. This 37% rate, which currently kicks in for single taxpayers with income in excess of $520,000 and married taxpayers with income in excess $620,000, would jump to 39.6% on wages above $400,000 (married).

Top Tax Rate on Long-Term Capital Gains and Qualified Dividends

Biden would increase the top rate on long-term capital gains and qualified dividends from 20% to 39.6% for taxpayers earning more than $1 million.

Payroll Taxes

Biden has promised to lift the cap on the Social Security payroll tax, but only on wages in excess of $400,000.

Estate Tax

Biden is proposing sweeping changes to estate tax regulations. The rate would rise to 45% on taxable estates. The exemption would drop to $3.5 million per individual. And death would become a realization event — any appreciation in your assets (unrealized capital gains) would be taxed upon your demise.

 

TAX PLANNING FOR 2020? Maybe.

What about tax planning moves to make right now? Before December 31, 2020, there are several tax strategies that might be tax efficient, philanthropic, or legacy minded.

The CARES Act

If you anticipate itemizing deductions for 2020, the adjusted gross income (AGI) limit for cash contributions was increased for individual donors. For cash contributions made in 2020, you can now elect to deduct up to 100 percent of your AGI (increased from 60 percent). Cash contributions meaning writing a check or using a credit card.

If you do not anticipate itemizing, the CARES Act allows for an additional, “above-the-line” deduction for charitable gifts made in cash of up to $300. If you are not itemizing on your 2020 taxes, you can claim this new deduction.

Roth Conversions

May be a consideration for those who did not claim their Required Minimum Distribution (RMD) this year (special 2020 waiver. In place of the taxable RMD income, the transfer of funds from your traditional IRA to a ROTH IRA may make sense. In some cases, the amount of a ROTH conversion equal to the RMD not taken allows you to remain in the same marginal tax bracket. As a refresher, a ROTH is not subject to RMD like a traditional IRA is and can be used as a great legacy vehicle. It would be prudent to consult with your tax professional to see if this makes sense.

IRA Qualified Charitable Distributions (QCD)

The CARES Act did not change the rules around the QCD which allows individuals over 70½ years old to donate up to $100,000 in IRA assets directly to charity annually, without taking the distribution as taxable income.

However, remember that under the CARES Act an individual can elect to deduct 100 percent of their AGI for cash charitable contributions. This effectively affords individuals over 59½ years old the tax benefits similar to a QCD; for instance, they can take a cash distribution from their IRA, contribute the cash to charity, and may completely offset the tax attributable to the distribution by taking a charitable deduction in an amount up to 100 percent of their AGI for the tax year.

If you are planning a large donation in 2020, this may be a tax-smart strategy as long as you are between the ages of 59½ and 70½ and are not dependent on existing retirement funds.

As always, donors should consult with their tax and legal advisors when considering their charitable giving.