Uncertain Times Make 2020 Tax Planning Especially Important
2020 – 11/16 While there is always a degree of uncertainty at the end of the year that affects tax planning, there’s an additional level of ambiguity this year. Between the 2020 elections, special tax rules related to the COVID-19 pandemic and sharp swings in asset prices, year-end tax planning is particularly important this year.
At this writing, the outcome of the presidential election is not yet official, but if Joe Biden is sworn in, there is a strong possibility that he will seek to pass legislation that will increase taxes for high earners and corporations. However, his ability to pass tax reform proposals will be heavily affected by whether or not Republicans maintain control of the Senate, and this will not be determined until Georgia holds its two run-off elections in January 2021. Amid this uncertainty, 2020 tax planning is imperative to prepare for potential 2021 tax increases and to take advantage of income tax provisions that are set to expire at the end of 2020.
With all this in mind, the four following planning opportunities should be considered before the tax year ends:
Net Operating Losses
The CARES Act, which was passed in March as a response to the COVID-19 pandemic, granted businesses the opportunity to offset taxable losses generated in 2018, 2019, and 2020 against taxable income generated in the previous five years. These net operating losses (NOLs) were already eligible to offset taxable income in future years, but carrying them back to prior years allows businesses to request a tax refund immediately after filing their 2020 tax return rather than having to wait until future years to recognize a tax benefit.
Businesses expecting to break even or incur a loss in 2020 should consult their advisor to determine if there are opportunities to accelerate deductions this year to maximize the potential refund resulting from the carry back of their 2020 NOL.
The Tax Cuts and Jobs Act (TCJA) of 2017 boosted the gift and estate tax exemption from $5.49 million in 2017 to $11.58 million in 2020, and these increases are not set to expire until 2026. However this could change under a new administration faced with a growing national deficit. The exemption could be reduced as soon as 2021.
This possibility, coupled with interest rates near historical lows and many assets’ values falling as a result of the pandemic, justifies serious consideration for utilizing gift and estate-planning strategies before the exemption is decreased and interest rates and asset values rebound.
Required Minimum Distributions
An additional provision of the CARES Act offers taxpayers the opportunity to forego taking their 2020 required minimum distribution (RMD) from their retirement plans. The intent of this measure was to avoid taking distributions from retirement accounts at a time when asset values were depressed. However, now that security prices have rebounded strongly, taxpayers should reconsider taking a distribution to take advantage of 2020’s lower tax rates.
As an additional benefit, while RMDs are normally ineligible for rollovers to other plans, the waiver allows for 2020 distributions from a traditional IRA or defined benefit plan to be converted to a Roth IRA. While the distribution will still be taxed in the same manner as any other RMD, converting these funds to a Roth IRA will allow the funds to grow in a tax-free account.
Qualified Charitable Distributions
For IRA holders over the age of 70 ½, up to $100,000 may be contributed directly from a traditional IRA account to 501(c)(3) charities as a qualified charitable distribution (QCD). While many taxpayers no longer receive a tax benefit from their charitable contributions due to the standard deduction being increased by the TCJA, eligible taxpayers who utilize QCDs will enjoy a tax benefit from their contributions by having their QCDs excluded from their taxable income. Additionally, QCDs also decrease taxable IRA account balances that will otherwise be taxed upon withdrawal in future years.
With potential tax increases on the horizon and current provisions expiring at the end of the year, 2020 year-end tax planning is crucial. If you are interested in discussing these and other planning opportunities, please contact us.