Page 33 - BusinessWest November 23, 2020

Tax Planning tax deduction when Continued from page 30 you can.
Estimated Tax Payments
The IRS requires you to pay federal income tax through any combination of quarterly installments and tax withholding. Otherwise, it may impose an ‘estimated tax’ penalty.
However, no estimated tax penalty is assessed if you meet one of these three ‘safe harbor’ exceptions under the tax law:
• Your annual payments equal at least 90% of your current liability;
• Your annual payments equal at least 100% of the prior year’s tax liability (110% if your AGI for the prior year exceeded $150,000); or
• You make installment payments under an ‘annu- alized income’ method. This option may be available to taxpayers who receive most of their income during the holiday season.
If you have received unemployment benefits in 2020 — for example, if you lost your job due to the COVID-19 pandemic — remember that those ben- efits are subject to income tax. Factor this into your estimated tax calculations for the year.
Capital Gains and Losses
Frequently, investors time sales of assets such as securities at year-end to produce optimal tax results. For starters, capital gains and losses offset each other. If you show an excess loss for the year, it offsets up to $3,000 of ordinary income before being carried over to the next year. If you sell securities at a loss and reacquire substantially identical securities within 30 days of the sale, the tax loss is disallowed.
• Long-term capital gains from sales of securities owned longer than one year are taxed at a maximum rate of 15%, or 20% for certain high-income investors. Conversely, short-term capital gains are taxed at ordi- nary income rates reaching up to 37% in 2020.
• Review your investment portfolio. Depending on your situation, you may harvest capital losses to offset gains realized earlier in the year or cherry-pick capital gains that will be partially or wholly absorbed by prior losses.
Net Investment-income Tax
In addition to capital-gains tax, a special 3.8% tax applies to the lesser of your net investment income (NII), or the amount by which your modified adjusted gross income (MAGI) for the year exceeds $200,000 for single filers or $250,000 for joint filers. (These thresholds are not indexed for inflation.) The defini- tion of NII includes interest, dividends, capital gains, and income from passive activities, but not Social Security benefits, tax-exempt interest, and distribu- tions from qualified retirement plans and IRAs.
• Assess the amount of your NII and your MAGI at the end of the year. When it is possible, reduce your NII tax liability in 2020 or avoid it altogether.
Required Minimum Distributions
As a general rule, you must receive required mini- mum distributions (RMDs) from qualified retirement plans and IRAs after reaching age 72 (701⁄2 for taxpay- ers affected prior to 2020). The amount of the RMD is based on IRS life-expectancy tables and your account balance at the end of last year
• Take RMDs in 2020 if you need the cash. Other- wise, you can skip them this year, thanks to a suspen- sion of the usual rules by the CARES Act. There is no requirement to demonstrate any hardship relating
to the pandemic. Finally, although RMDs are no lon- ger required in 2020, consider a qualified charitable distribution (QCD). If you are age 701⁄2 or older, you
can transfer up to $100,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This may benefit your overall tax picture.
IRA Rollovers
If you receive a distribution from a qualified retirement plan or IRA, it is generally subject to tax unless you roll it over into another qualified plan or IRA within 60 days. In addition, you may owe a 10% tax penalty on taxable distributions received before age 591⁄2. However, some taxpayers may have more leeway to avoid tax liability in 2020 under a special CARES Act provision.
• Take your time redepositing the funds if it quali- fies as a COVID-19-related distribution. The CARES Act gives you three years, instead of the usual 60 days, to redeposit up to $100,000 of funds in a plan or IRA without owing any tax.
• To qualify for this tax break, you (or your spouse, if you are married) must have been diagnosed with COVID-19 or experienced adverse financial conse- quences due to the virus (e.g., being laid off, having work hours reduced, or being quarantined or fur- loughed). If you do not replace the funds, the result- ing tax is spread evenly over three years.
“Be aware of potential complications caused by the ‘kiddie tax.’ Generally, unearned income above $2,200 received in 2020 by
a child younger than age 19, or a child who is a full-time student younger than age 24, is taxed at the top marginal tax rate of the child’s parents.
• This may be a good time to consider a conver- sion of a traditional IRA to a Roth IRA. With a Roth, future payouts are generally exempt from tax, but you must pay current tax on the converted amount. Have a tax professional help you determine if this makes sense for your situation.
Estate and Gift Taxes
Since the turn of the century, Congress has gradu- ally increased the federal estate-tax exemption, while eventually establishing a top estate-tax rate of 40%. The TCJA doubled the exemption from $5 million to $10 million for 2018 through 2025, inflation-indexed to $11.58 million in 2020.
Miscellaneous
You can contribute up to $19,500 to a 401(k) in 2020 ($26,000 if you are age 50 or older).
BIDEN’S NOTABLE TAX PROPOSALS Business Tax
• The statutory corporate tax rate would be increased from 21% to 28%.
• The benefits of the Section 199A/qualified business-income deduction would be phased out for individuals with taxable income greater than $400,000.
• The real-estate industry will potentially be impacted. The Biden campaign had suggested poten- tial changes to the §1031 like-kind exchange provi- sions as well as changes to effectively limit losses that may be utilized by real-estate investors.
Individual Tax
Many of the revenue-raising aspects of the Biden tax proposal for individuals apply only to those tax- payers with taxable income over $400,000. It has not been specified whether this threshold is to be adjust- ed for filing status.
• The top ordinary rate would be restored to 39.6% for taxpayers with income over $400,000. This reflects a return to pre-2017 tax reform when the top ordinary rate was dropped to 37%.
• For top income earners, this rate is currently capped at 20% (plus 3.8% to the extent subject to the net investment-income tax). Under the Biden plan, capital gains and qualified dividends will be subject to the top rate of 39.6% for individuals with more than $1 million in income.
• The Section 199A/qualified business-income deduction would begin to phase out for individuals over $400,000 in taxable income.
• Itemized deductions would be capped to 28% of value. Additionally, benefits would begin to phase out for individuals with taxable income over $400,000.
• The child and dependent care credit would be increased to a maximum of $8,000 for low-income and middle-class families. In addition, the credit would be made refundable.
• First-time homebuyers could receive up to $15,000 of refundable and advanceable tax credit.
• There could be temporary expansion of the child tax credit, depending on the progression of the pan- demic and economic conditions. This expansion would increase the credit from $2,000 to $3,000 for children 17 or younger with an additional $600 for children under 6. The credit would also be refundable and allowable to be received in monthly installments.
Gift and Estate Tax
The gift- and estate-tax exemption amount would be reduced. Many are suggesting that Biden is look- ing to reduce the gift- and estate-tax exemption to the pre-TCJA levels.
Conclusion
This year-end tax-planning letter is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.
Finally, remember that this article is intended to serve only as general guideline. Your personal circum- stances will likely require careful examination. u
Kristina Drzal Houghton, CPA, MST is partner, Executive Committee, and director of Taxation Services at Meyers Brothers Kalicka; (413) 536-8510.
”
BusinessWest
ACCOUNTING & TAX PLANNING
NOVEMBER 23, 2020 33
Under the ‘portability provision’ for a married cou- ple, the unused portion of the estate-tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse. This tax break is now permanent.
Finally, guidance has been published establishing that, when the exemption is decreased in the future, a recapture or ‘claw-back’ of the extra exemption used will not be required.
Update your estate plan to reflect current law.
You may revise wills and trusts to accommodate the rule allowing portability of the estate-tax exemption. Additionally, consider the maximum gifting currently as allowable in your financial position.