There are only a few days left to go before the year ends, but
here are some actions you may take before the end of the year
to improve the your tax situation for 2020 and beyond.
Consider Biden's proposals. As the year comes
to an end, it is hard to predict what, if anything, that Mr. Biden has
proposed will become law and take effect in 2021. Many believe that
taxes will have to be raised after the economic effects of the pandemic
are tamed, to pay for the increased federal spending caused by the
pandemic. But enacting tax legislation of any sort is likely to be a
slow process and could very conceivably not affect 2021 taxes.
In any case, here are some of Mr. Biden's most noteworthy tax proposals:
Tax increase proposals
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Raise the highest individual income tax rate to 39.6% from 37%.
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Cap itemized deductions for the wealthiest Americans at 28%.
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End favorable capital gains rates, including those rates on dividends, for anyone with income of more than $1 million.
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Eliminate basis step-up at death, accompanied by taxing all appreciated investments at death.
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Dropping the estate and gift tax exemption to its pre-Tax Cuts and Jobs Act level.
Tax decrease proposals.
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$8,000 tax credit to help offset the costs of child care.
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Exclusion for student loans that have been forgiven.
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A refundable tax credit for low- and middle-income workers who
contribute to IRAs and employer-provided retirement savings plans.
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Catch-up contributions to retirement plans for caregivers of any age who leave the workforce for at least a year.
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A $5,000 tax credit for family caregivers.
Solve underpayment of estimated tax/withheld tax issues.
Have an extra amount of withholding in order to solve an underpayment of estimated tax problem.
Employees may discover that their prepayments of tax for 2020 have been
too small because, for example, their estimate of income or deductions
was off and they are underwithheld, or they failed to make estimated tax
payments for unanticipated income, such as gains from sales of stock.
Or they may have an underpayment of estimated tax because of the
additional 0.9% Medicare tax and/or the 3.8% surtax on unearned income.
To ward off or reduce an estimated tax underpayment penalty, employees
can ask their employers to increase withholding for their last paycheck
or paychecks to make up or reduce the deficiency. Employees can file a
new Form W-4 or simply request that the employer withhold a flat amount
of additional income tax. Increasing the final estimated tax payment for
2020 (due on Jan. 15, 2021) can cut or eliminate the penalty for a
final-quarter underpayment only. It doesn't help
with underpayments for preceding quarters. By contrast, tax withheld on
wages can wipe out or reduce underpayments for previous quarters
because, as a general rule, an equal part of the total withholding
during the year is treated as having been paid on each quarterly
estimated payment date.
Reference: See FTC 2d/FIN ¶ S-5248.
Take a retirement plan distribution in order to solve an underpayment of estimated tax problem.
An individual can take an eligible rollover distribution from a
qualified retirement plan before the end of 2020 if he or she is facing a
penalty for underpayment of estimated tax and the extra withholding
option described above is unavailable or won't sufficiently address the
problem. Unless the taxpayer chooses no withholding, the withholding
rate for a nonperiodic distribution (a payment other than a periodic
payment) that is not an eligible rollover distribution is 10% of the
distribution. The taxpayer can also ask the payer to withhold an
additional amount using Form W-4P. The taxpayer can then timely roll
over the gross amount of the distribution, as increased by the amount of
withheld tax, to a traditional IRA. No part of the distribution will be
includible in income for 2020, but the withheld tax will be applied pro
rata over the full 2020 tax year to reduce previous
underpayments of estimated tax.
Reference: See FTC 2d/FIN ¶ S-5248.
Charitable donations.
Use IRAs to make charitable donations. Taxpayers who have
reached age 70½ by the end of 2020, own IRAs, and are thinking of making
a charitable gift should consider arranging for the gift to be made by
way of a qualified charitable contribution, or QCD—a direct transfer
from the IRA trustee to the charitable organization. Such a transfer
(not to exceed $100,000 for all such transfers for 2020) will neither be
included in gross income nor allowed as a deduction on the taxpayer's
return. But, since such a distribution is not includible in gross
income, it will not increase AGI for purposes of the phaseout of any
deduction, exclusion, or tax credit that is limited or lost completely
when AGI reaches certain specified level.
Taxpayers who have reached age 72 by Dec. 31 normally must take required
minimum distributions (RMDs) from their IRAs or 401(k) plans (or other
employer-sponsored retired plans) by Dec. 31. However, there is no such
requirement for 2020.
Nonetheless, a QCD before Dec. 31, 2020 is still a good idea for retired
taxpayers who don’t need all of their as-yet undistributed RMD for
living expenses. That’s because a 2020 QCD will reduce the taxpayer's
retirement account balance and thus reduce the amount of the RMD that
must be withdrawn in future tax years.
Reference: See FTC 2d/FIN ¶ H-12253.2 et seq.
Charitable donation by non-itemzers. Non-itemizers can deduct
up to $300 of cash charitable donations that they make in 2020. While
the Consoidated Appropriations Act, 2021 (CAA, 2021), if signed into
law, provides for an additional charitable deduction in 2021 for
non-itemizers, to get the $300 deduction for 2020, the donation must be
made before year-end 2020.
And, because CAA, 2021 does provide for a charitable deduction for
non-itemizers for 2021, taxpayers should consider holding off in making
contributions over $300 for 2020 and making those "excess contributions"
in 2021.
Reference: See FTC 2d/FIN ¶ A-2630.
Higher limit on charitable contributions. In response to the
Coronavirus (COVID-19) pandemic, the limit on charitable contributions
of cash by an individual in 2020 was increased to 100% of the
individual's contribution base. For previous years, the limit was 60% of
the contribution base. The contribution base is a modification of
adjusted gross income.
While this increased limit was extended to 2021 by the CAA, 2021,
taxpayers should consider increasing 2020 contributions to take
advantage of the increased limit.
Reference: See FTC 2d/FIN ¶ K-3672.4.
Retirement plans.
Establish a Keogh plan. A self-employed person who wants to
contribute to a Keogh plan for 2020 must establish that plan before the
end of 2020. If that is done, deductible contributions for 2020 can be
made as late as the taxpayer's extended tax return due date for 2020.
Reference: See FTC 2d/FIN ¶ H-10017.
Relief with respect to withdrawal from retirement plans. A
distribution from a qualified retirement plan is generally subject to a
10% additional tax unless the distribution meets an exception under Code
Sec. 72(t).
2020 legislation provides that the Code Sec. 72(t) 10% additional tax
does not apply to any coronavirus-related distribution, up to $100,000. A
coronavirus-related distribution is any distribution made on or after
January 1, 2020, and before December 31, 2020, from an eligible retirement plan, made to a qualified individual.
A qualified individual is an individual
- Who is diagnosed with the virus SARS-CoV-2 or with
coronavirus disease 2019 (COVID-19) by a test approved by the Centers
for Disease Control and Prevention (CDC),
- Whose spouse or dependent (as defined in Code Sec. 152) is diagnosed with such virus or disease by such a test, or
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Who experiences adverse financial consequences as a result of being
quarantined, being furloughed or laid off or having work hours reduced
due to such virus or disease, being unable to work due to lack of child
care due to such virus or disease, closing or reducing hours of a
business owned or operated by the individual due to such virus or
disease, or other factors as determined by the Secretary of the
Treasury.
Other relief also applies to coronavirus-related distributions,
including the ability to recognize income over a 3-tax-year period.
Reference: See FTC 2d/FIN ¶ H-11119.
Other.
Make year-end gifts. A person can give any other person up to
$15,000 for 2020 without incurring any gift tax. The annual exclusion
amount increases to $30,000 per donee if the donor's spouse consents to
gift-splitting. Anyone who expects eventually to have estate tax
liability and who can afford to make gifts to family members should do
so. Besides avoiding transfer tax, annual exclusion gifts take future
appreciation in the value of the gift property out of the donor's
estate, and they shift the income tax obligation on the property's
earnings to the donee who may be in a lower tax bracket (if not subject
to the kiddie tax).
A gift by check to a noncharitable donee is considered to be a completed
gift for gift and estate tax purposes on the earlier of:
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The date on which the donor has so parted with dominion and control
under local law so as to leave the donor with no power to change its
disposition, or
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The date on which the donee deposits the check (or cashes it against
available funds of the donee) or presents the check for payment, if it
is established that:
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The check was paid by the drawee bank when first presented to the drawee bank for payment;
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The donor intended to make a gift;
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The donor was alive when the check was paid by the drawee bank;
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Delivery of the check by the donor was unconditional; and
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The check was deposited, cashed, or presented in the calendar year for
which completed gift treatment is sought and within a reasonable time of
issuance.
Thus, for example, a $15,000 gift check given to and deposited by a
grandson on Dec. 31, 2020 is treated as a completed gift for 2020 even
though the check doesn't clear until 2021 (assuming the donor is still
alive when the check is paid by the drawee bank).
Reference: See FTC 2d/FIN ¶ Q-1916.
Watch out for the use-it-or-lose-it rule. Unused cafeteria plan
amounts left over at the end of a plan year must generally be forfeited
(use-it-or-lose-it rule). A cafeteria plan can provide an optional
grace period immediately following the end of each plan year, extending
the period for incurring expenses for qualified benefits to the 15th day
of the third month after the end of the plan year. Benefits or
contributions not used as of the end of the grace period are forfeited.
Under an exception to the use-it-or-lose-it rule, at the plan sponsor's
option and in lieu of any grace period, employees may be allowed to
carry over up to $500 of unused amounts remaining at year-end in a
health flexible spending account.
Taxpayers thus should make sure they understand their employer's plan
and should make last-minute purchases before year end to the extent that
not doing so will result in losing benefits. In most cases, a trip to
the drug store, dentist or optometrist, for goods or services that the
taxpayer would otherwise have purchased in 2021, can avoid "losing it."
Reference: See FTC 2d/FIN ¶ H-2417.
Paying by credit card creates deduction on date of credit card transaction.
Taxpayers should consider using a credit card to pay deductible
expenses before the end of the year. Doing so will increase their 2020
deductions even if they don't pay their credit card bill until after the
end of the year.
Reference: See FTC 2d/FIN ¶ G-2436.
Renew ITINs that expire on Dec. 31. Any individual filing a
U.S. tax return is required to state his or her taxpayer identification
number on that return. Generally, a taxpayer identification number is
the individual's Social Security number (SSN). However, IRS issues
Individual Taxpayer Identification Numbers (ITINs) to individuals who
are not eligible to be issued an SSN but who still have a U.S. tax
filing obligation.
Unlike SSNs, ITINs expire if not used on a return for three consecutive
years or after a certain period. For example, ITINs issued in 2012 and
2013 (i.e., those with middle digits 90, 91, 92, 94, 95, 96, 97, 98 or
99) expire on December 31, 2020.
Anyone whose ITIN is expiring at the end of 2020 needs to file a
complete renewal application, Form W-7, Application for IRS Individual
Taxpayer Identification Number.
Reference: For the ITIN program, see FTC 2d/FIN ¶S-1582.1 et seq.
Increase 2020 itemized deductions via a "bunching strategy."
Many taxpayers who claimed itemized deductions in prior years will no
longer be able to do so. That’s because the standard deduction has been
increased and many itemized deductions have been cut back or abolished.
Paying some otherwise-deductible-in-2021 itemized deductions in 2020 can
decrease taxable income in 2020 and will not increase 2021 taxable
income if 2021 itemized deductions would otherwise have still been less
than the 2021 standard deduction. For example, a taxpayer who expects to
itemize deductions in 2020 but not 2021, and usually contributes a
total of $1,500 to charities each year, should consider making a total
of $3,000 of charitable contributions before the end of 2020 (and
skipping charitable contributions in 2021).
Reference: See FTC 2d/FIN ¶ G-243
For help with your legal needs contact a business, tax, and health care law attorney at the offices of AttorneyBritt.
