7 Tax Planning Moves to Consider Before Year-End

Be proactive to reduce your 2020 individual tax bill and prepare for 2021

With the recent election results becoming more clear, individual taxpayers now have a lot more to consider as they think about year-end tax planning for 2020.

President-Elect Joe Biden has stated that he would like to raise the marginal tax rate for individuals making over $400,000 a year, increase the tax rate on capital gains and qualified dividends, and change the deduction for Qualified Business Income (QBI). While it’s not clear whether he’ll have Congressional support for any of these moves, it’s prudent to examine your tax strategy for 2020 and 2021 with an eye towards possible changes in tax law.

In general, we recommend that taxpayers look at tax planning over a two-year period; below are a few strategies to consider now.

1. Take advantage of current lifetime gift tax exemptions

Currently, the estate, gift and GST tax exemptions are each $11.58 million per individual. These are all-time highs, and the Internal Revenue Service (IRS) has made it clear that it will not claw back taxes on any funds gifted under current law, even if the limit decreases in the future. That alone would be reason enough to consider taking advantage of these relatively high exemptions to transfer wealth, real estate, securities, business ownership and other assets before the end of the year.

In addition, many assets may have decreased in value this year due to the economic fallout of the COVID-19 pandemic – and this presents a unique estate planning opportunity.

The value of assets you transfer to family members, or to trusts for their benefit, is effectively “frozen” at the moment of transfer, which means any appreciation that occurs after the transfer generally avoids the estate or gift tax. There are a variety of ways to transfer assets to family members. Consult with a certified valuation professional in addition to your estate planning professional regarding the valuation of such transfers and the related tax implications.

2. Seek advice if you have international ties

International tax rules in the U.S. continue to become more complicated. For instance, the lifetime gift tax exemption can change based on whether you or the person you’re gifting to is considered U.S.-domiciled. In the case of spouses or children, if one is already considered a U.S. person and others are not yet (perhaps someone is wrapping things up in the foreign country and has not yet fully moved to the U.S.), there may be benefits to making a gift or transfer before the non-U.S. person relocates.

If you’re planning a gift or transfer and there are any international considerations, speak with an international tax professional before year-end to prevent an unexpected tax liability from decreasing its value.

If you or your spouse has moved to the U.S. this year, or is in the process of doing so, it’s also a good idea to talk with your tax professional as soon as possible. The determination of whether you are subject to U.S. taxes is complicated, and your actions even in the last few weeks of the year can have a significant impact on your taxes.

Some non-U.S. persons found themselves stuck in the U.S. longer than expected this year for reasons related to COVID-19. An international tax professional can help you determine which of those days spent in the U.S. will ultimately count in calculating whether you are subject to U.S. taxes under the “substantial presence” test. Several U.S. states have also issued guidance related to foreigners stranded in the U.S. due to COVID-19.

For certain U.S.-based C corporations, S corporations, partnerships and individuals that have foreign subsidiaries and pay taxes in foreign jurisdictions, the tax code changed dramatically in 2018-2019.

Of particular note are rules surrounding global intangible low-taxed income (GILTI), which have made many taxpayers subject to U.S. tax when they previously were not. This is currently a 10.5% minimum tax imposed on profits of qualified foreign affiliates of U.S. companies; though the effective tax rate on foreign profits can be much higher, and recent regulations provide for profits taxed above 18.9 percent to be exempt from the minimum tax. President-Elect Biden has proposed doubling that rate to 21% and change the calculation to a country- by-country minimum tax approach.

3. Understand the CARES Act’s effect on retirement plans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) waived required minimum distributions (RMD) for 2020. If you are subject to RMD and haven’t taken a distribution from your retirement plans yet this year, consider whether to skip it. Unfortunately, the deadline to return distributions has passed.

For 2020, the CARES Act also waived the 10% penalty on early withdrawals from qualified retirement plans under specific conditions: distributions must be made to an individual or spouse of an individual who was diagnosed with COVID-19 via a CDC-approved test or experienced negative financial consequences from COVID-19 due to layoff, business closure or reduced hours. Note that income resulting from the early withdrawal is subject to tax, and you can recontribute the amounts withdrawn to a qualified retirement plan within three years, regardless of annual contribution caps.

4. Make smart retirement plan contributions

Deferring income to retirement plans is an easy way for individuals to lower taxable income for this year, while saving for future years. Taxpayers who are employed and participate in a 401(k) retirement plan can contribute up to $19,500 during 2020; those over age 50 can contribute up to $26,500.

If you have a traditional IRA, your contribution limit for 2020 is $6,000, or $7,000 for taxpayers 50 or older. Keep in mind if you or your spouse is covered by a retirement plan at work and your income is above certain limits, you may be restricted in deducting the IRA contribution. The limit on contributions to a Roth IRA, which are not deducted from your taxes, varies based on modified adjusted gross income (AGI).

For 2020, note that there is no age limit on making regular contributions to a traditional IRA, which is a change from 2019, when individuals age 70 ½ or older could not make a regular contribution to a traditional IRA.

Self-employed individuals may contribute up to $57,000 to a SEP IRA for 2020, all of which is tax-deductible. Business owners with no employees who have a one-participant (solo) 401(k) plan, have the same employee contribution limit as other 401(k) plans, but can also make an employer contribution. Your tax professional can walk you through determining the employer contribution; the maximum total contribution – employer plus employee – for those under age 50 cannot exceed $57,000.

Those over 50 may be able to contribute several hundred thousand pre-tax dollars to a defined-benefit plan.

The bottom line: Be sure to talk with your tax and financial advisors about the best retirement savings vehicles for your situation.

5. Consider accelerating income

With the potential for increased taxes on high earners, capital gains and dividends in 2021 or beyond, you may want to consider accelerating income such as bonuses, capital payouts, sales of securities or property sales into 2020 if possible. Similarly, if you’re selling your business or a share in your business, you may want to close that transaction before the end of the year.

6. Plan your charitable contributions

Beginning in the 2020 tax year, single or joint filers can take a tax deduction of up to $300 for charitable contributions of cash (including checks and credit card payments) to a 501(c)(3), even if you do not itemize your taxes. For taxpayers who itemize, the 60% of adjusted gross income (AGI) limitation on cash contributions to certain qualified charities has been increased to 100% of AGI for the 2020 tax year.

For 2020, the standard tax deduction for single filers is $12,400; for joint filers it is $24,800. If you plan to make annual charitable contributions, and you are close to the threshold for taking the standard deduction versus itemizing, talk to your tax advisor. You may benefit by doubling your charitable contributions every other year, instead of making annual contributions.

7. Understand state tax implications

While Florida does not have a state income tax, many other states do. If you are moving to Florida this year, you may still be subject to another state’s income tax. If you spent more time than usual in another state, you may also be subject to income tax in that state. Actions you take during the last few weeks of this year could significantly impact your tax liability.

Contact your Kaufman Rossin tax advisor to learn more about what you can do now to avoid tax surprises and possibly lower your 2020 tax bill.