2020 Tax Planning Guide - Wells Fargo Advisors
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INFORMATION PUBLISHED AS OF APRIL 2020 2020 Tax Planning Guide Investment and Insurance Products: u NOT FDIC Insured u NO Bank Guarantee u MAY Lose Value
2020 TAX PLANNING GUIDE Table of contents Tax planning in 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Long-term care deduction for policy premiums. . . . . . . . 27 2020 income tax rate schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Real estate investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Alternative minimum tax (AMT). . . . . . . . . . . . . . . . . . . . . . . . . . 9 Health savings account (HSA) limits. . . . . . . . . . . . . . . . . . . . . 29 Medicare surtax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Federal trust and estate income tax.. . . . . . . . . . . . . . . . . . . . . 30 Capital gains, losses, and dividends. . . . . . . . . . . . . . . . . . . . . . 11 Estate and gift tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Qualified Opportunity Zones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Corporate income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Education planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 The CARES Act and businesses. . . . . . . . . . . . . . . . . . . . . . . . . . 34 Kiddie tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Qualified business income deduction.. . . . . . . . . . . . . . . . . . . 35 Retirement accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Municipal bond taxable-equivalent yields. . . . . . . . . . . . . . 38 Social Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2020 important deadlines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Charitable contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 PAGE | 2
2020 TAX PLANNING GUIDE Tax planning in 2020 PAGE | 3
2020 TAX PLANNING GUIDE
At the time this guide is published in April 2020, we are Be sure to consult with your investment, planning, legal,
in unprecedented times as a result of the COVID-19 and tax professionals to determine the right approach for
pandemic. This guide will address its impact and some your needs, goals, and financial situation.
potential strategies to consider while the market is volatile
and interest rates are low. At the end of March 2020, the Planning with market volatility and low
Coronavirus Aid, Relief, and Economic Security (CARES) interest rates
Act was passed with the goal of helping support individuals
and businesses through these times. In coming months, The guide will touch on various strategies that are
there may be additional tax changes announced or other conducive to a time when values are depressed and rates
stimulus packages that may impact what is discussed in are low. Some options to consider include:
this guide. • Converting your traditional IRA to a Roth IRA—with
Furthermore, the Setting Every Community Up for lower values, the income taxes due in the year of
Retirement Enhancement (SECURE) Act passed at the end conversion will be lower and future distributions will be
of 2019 brings significant changes to the way retirement tax-free.
plans serve wealth management goals. Also, with the • If you have stock options and intend to hold the stock,
elections occurring this year, due to significant tax policies consider exercising now as you will be paying ordinary
among the candidates, year-end could either increase the income tax rates at exercise and capital gain rates when
urgency of making taxable gifts to family members or have you sell the stock.
little change in current estate planning techniques.
• Gifting securities at a lower value could increase the
Use this guide to inform you of discussions to have impact of the gift as values increase in the future. If
with your wealth planners, advisors, and tax and legal possible, you may also want to consider substituting
professionals. Market volatility, low interest rates, the assets in a previously created irrevocable grantor trust
passing of the CARES Act and the SECURE Act, and the with assets that have a higher potential for growth.
potential impact of the 2020 elections do not exist as
separate events from a planning perspective. Throughout The CARES Act stimulus package
this guide, you will see how these are linked and the
On March 27, 2020, the CARES Act was signed in to
strategies that exist to make thoughtful choices that can
law. This $2 trillion aid package is meant to help both
positively impact your income and estate tax liability.
individuals and businesses, with cash payments to
individuals, additional unemployment benefits, grants and
Using the guide
loans for small businesses, and a tax credit for impacted
The 2020 Tax Planning Guide provides the details of the businesses to assist with payroll obligations.
current tax law, items for you to be aware of both now and
This guide will address some of these changes in regard to
throughout the year, steps you can take to potentially defer
retirement plans and business owners; however, it is meant
taxes, and options to consider in light of current market
to provide an overview. The CARES Act is currently being
volatility and low interest rates. Throughout each section of
interpreted with more clarifications addressed nearly every
the guide, you’ll find (where applicable):
day. Be sure to reach out to your team of trusted advisors
• Tax schedules/tables for the various income and for assistance with the latest information published.
asset categories
• Additional tax information about these categories
• Potential strategies to consider
PAGE | 4
2020 TAX PLANNING GUIDE
Review how the SECURE Act Be prepared for change
impacts you
Keep in mind that while many of the corporate tax changes
On December 20, 2019, the SECURE Act was signed into are permanent, the ones that benefit individual taxpayers
law, making both retirement-related and non-retirement- are scheduled to expire on December 31, 2025. A change
related changes. The major retirement changes include in administration could accelerate the expiration of these
substantially limiting the ability to use stretch provisions changes and cause you to re-think timing around certain
for IRAs inherited in 2020 or later, increasing the age to estate and tax planning strategies.
begin required minimum distributions to 72 for those
turning 70½ after December 31, 2019, and removing the Connect regularly with your advisors
maximum age for traditional IRA contributions.
While the strategies in this guide can be effective in
The major non-retirement-related changes include: helping manage your tax burden, they are not all-inclusive
• Expanding Section 529 plans to allow distributions to or a destination in and of themselves. A better starting
repay student loans point is a strategic financial plan tailored for your specific
needs and goals. Only by sitting down with your trusted
• Taxing children’s unearned income at their parents’ rates
advisors to define and prioritize your objectives and review
(previously at trust rates)
them against your current situation can you know which
• Extending certain deductions, including reducing the solutions and strategies may be the most appropriate
adjusted gross income floor for medical and dental for you.
expenses to 7.5% from 10% (for 2019 and 2020), treating
Establishing a plan with your local wealth planning
tuition and fees as an above-the-line deduction, and
professional and revisiting it on a regular basis can help you
allowing mortgage insurance premiums to continue to be
make appropriate adjustments as needed, avoid potential
deductible as qualified residence interest.
pitfalls, and keep you on track to reach your long-term
Some of the specific changes surrounding the SECURE Act objectives. Given current market volatility and the chance
will be discussed later in this guide. for significant tax law changes in 2021, taxpayers need to
create a Plan A and a Plan B so they can execute quickly.
Verify your withholding and quarterly tax
Finally, connect with your legal and tax advisors before
payments for 2020 taking any action that may have tax or legal consequences
The Tax Cuts and Jobs Act (TCJA) of 2017 removed the to determine how the information in this guide may apply
concept of dependency exemptions effective in 2018. to your specific situation at the time your tax return is filed.
However, the dependency exemption plays a major role in
the calculation of federal tax withholding for taxpayers who
receive a salary. As opposed to just covering salary, the new
W-4 calculation can be used to withhold on different types
of income such as rental and investment income. With
this change, dependency exemptions previously selected
may no longer be appropriate. Everyone who has federal
withholding from salary should review their withholding
election and confirm it is still appropriate for their situation.
PAGE | 5
2020 TAX PLANNING GUIDE For the most up-to-date information on tax, legislative, and market updates, please visit our insights page: Wealth Planning in Uncertain Times PAGE | 6
2020 TAX PLANNING GUIDE
2020 income tax rate schedules
Married taxpayer filing jointly/surviving spouse rates
Taxable income* Tax
Over But not over Pay + % on excess Of the amount over
$0 $19,750 $0 10% $0
$19,750 $80,250 $1,975.00 12% $19,750
$80,250 $171,050 $9,235.00 22% $80,250
$171,050 $326,600 $29,211.00 24% $171,050
$326,600 $414,700 $66,543.00 32% $326,600
$414,700 $622,050 $94,735.00 35% $414,700
$622,050 $167,307.50 37% $622,050
Single taxpayer rates
Taxable income* Tax
Over But not over Pay + % on excess Of the amount over
$0 $9,875 $0 10% $0
$9,875 $40,125 $987.50 12% $9,875
$40,125 $85,525 $4,617.50 22% $40,125
$85,525 $163,300 $14,605.50 24% $85,525
$163,300 $207,350 $33,271.50 32% $163,300
$207,350 $518,400 $47,367.50 35% $207,350
$518,400 $156,235.00 37% $518,400
Head of household rates
Taxable income* Tax
Over But not over Pay + % on excess Of the amount over
$0 $14,100 $0 10% $0
$14,100 $53,700 $1,410.00 12% $14,100
$53,700 $85,500 $6,162.00 22% $53,700
$85,500 $163,300 $13,158.00 24% $85,500
$163,300 $207,350 $31,830.00 32% $163,300
$207,350 $518,400 $45,926.00 35% $207,350
$518,400 $154,792.50 37% $518,400
*Taxable income is income after all deductions (including either itemized or standard deduction) and exemptions.
PAGE | 7 Information in all tables from irs.gov unless otherwise specified
2020 TAX PLANNING GUIDE
Married taxpayer filing separately rates
Taxable income* Tax
Over But not over Pay + % on excess Of the amount over
$0 $9,875 $0 10% $0
$9,875 $40,125 $987.50 12% $9,875
$40,125 $85,525 $4,617.50 22% $40,125
$85,525 $163,300 $14,605.50 24% $85,525
$163,300 $207,350 $33,271.50 32% $163,300
PAGE | 5
$207,350 $311,025 $47,367.50 35% $207,350
$311,025 $83,653.75 37% $311,025
*Taxable income is income after all deductions (including either itemized or standard deduction) and exemptions.
Standard deductions
Married/joint $24,800
Single $12,400
Head of household $18,650
Married/separate $12,400
Dependents $1,100
For dependents with earned income, the deduction is the greater of $1,100 or earned income +$350 (up to the applicable standard deduction amount of $12,400).
Additional standard deductions
Married, age 65 or older or blind $1,300*
Married, age 65 or older and blind $2,600*
Single, age 65 or older or blind $1,650*
Single, age 65 or older and blind $3,300*
*Per person
Tax credit for dependent children
Modified adjusted gross income (MAGI) Tax credit for each child younger than age 17
Married/joint $0–$400,000 $2,000
Individual $0–$200,000 $2,000
Tax credit is reduced by $50 for each $1,000 by which the taxpayer’s MAGI exceeds the maximum threshold.
PAGE | 8
2020 TAX PLANNING GUIDE
Alternative
minimum tax
(AMT)
The alternative minimum tax (AMT) calculates income tax under different rules for income and
deductions. If the AMT calculation results in a higher tax, the taxpayer will be subject to AMT and pay
the higher tax. Generally, a taxpayer with a high proportion of income that receives favorable tax rates,
such as capital gains, is at risk of being subject to the AMT.
AMT income Tax
Up to $197,900* 26%
Over $197,900* 28%
*$98,950 if married filing separately
AMT exemption
Exemption Phased out on excess over
Married taxpayer filing jointly/surviving spouse $113,400 $1,036,800
Single taxpayer $72,900 $518,400
Married taxpayer filing separately $56,700 $518,400
Estates and trusts $25,400 $84,800
PAGE | 9
2020 TAX PLANNING GUIDE
Medicare surtax
The Medicare 3.8% surtax is imposed on certain types of unearned income Net investment income defined
of individuals, trusts, and estates with income above specific thresholds. For 1. Gross income from interest, dividends,
individuals, the surtax is imposed on the lesser of the following: annuities, royalties, and rents
• Net investment income for the tax year 2. Gross income from a passive activity or
a trade or business in which you do not
• The amount by which the modified adjusted gross income (MAGI) exceeds the
materially participate
threshold amount in that year
3. Net gain to the extent taken into
The threshold amounts account in computing taxable income
(such as capital gains) less the allowable
deductions that are properly allocable
Single filers Married filing jointly Married filing separately
to that gross income or net gain
$200,000 $250,000 $125,000
Special exception
For trusts and estates, the surtax is imposed on the lesser of the following:
In the case of the sale of an interest in
• The undistributed net investment income for the tax year a partnership or an S corporation, the
surtax is imposed only on the portion of
• The excess (if any) of the trust’s or estate’s adjusted gross income over the
a transferor’s net gain if the entity had
dollar amount at which the highest tax bracket begins ($12,950 in 2020)
sold all of its property for fair market
Note: The surtax does not apply to nonresident aliens. value immediately before the stock or
partnership was sold.
PAGE | 102020 TAX PLANNING GUIDE
Capital gains, losses,
and dividends
Short-term capital gains are taxed at the ordinary income tax rate for individuals Determine when to realize capital
and trusts regardless of filing status. However, long-term capital gains tax rates gains and losses
are not tied to the tax brackets. The table below shows the long-term capital Consult with your investment professional
gains tax rates. Qualified dividends are taxed at long-term capital gains rates, on whether realizing portions of your
while nonqualified dividends are taxed at ordinary income tax rates. portfolio’s gains (and losses) can help
manage the tax impact of activity in your
0% 15% 20% investment portfolio. In some cases, it
Single $0–$40,000 $40,001–$441,450 Greater than $441,450 may be advantageous to recognize larger
Married filing jointly/
gains sooner depending on the near-term
$0–$80,000 $80,001–$496,600 Greater than $496,600
surviving spouse outlook for your portfolio.
Married filing
$0–$40,000 $40,001–$248,300 Greater than $248,300 If you sell a security within one year of its
separately
purchase date, you will be subject to short-
Head of household $0–$53,600 $53,601–$469,050 Greater than $469,050
term capital gains. Short-term gains are
Estates and trusts $0–$2,650 $2,651–$13,150 Greater than $13,150
taxed based on ordinary income tax rates
Consult your tax advisor about how this applies to your situation. that can be as high as 40.8%, including the
3.8% Medicare surtax added to the top tax
bracket of 37.0%. Note that these rates do
Netting capital gains and losses
not include state and local tax rates, which
1. Net short-term gains and short-term losses. can be significant in some locations. As
such, short-term gains are taxed at nearly
2. Net long-term gains and long-term losses.
twice the rate of long-term gains.
3. Net short-term against long-term.
You cannot avoid some short-term gains,
4. Deduct up to $3,000 of excess losses against ordinary income per year. and others may be economically justifiable
even with the higher rate. However, if
5. Carry over any remaining losses to future tax years.
you can afford to wait until you have held
the asset for a full calendar year, you may
Capital loss harvesting
realize tax savings
Capital loss harvesting can be used to reduce taxes on other reportable capital
gains. This requires selling securities at a value less than the basis to create a
loss, which is generally used to offset other recognized capital gains. With the
potential for volatility in the market, harvesting capital losses should not be
limited to the end of the year; instead, consider reviewing this with your advisor
throughout the year to take advantage of market swings if you are anticipating
other capital gains.
PAGE | 112020 TAX PLANNING GUIDE
Prior to using this strategy, you should consider the following: Given current market conditions,
• The amount of the loss that will be generated and how that compares with be sure to review your portfolio
your net capital gains
with your advisors to determine if
• Whether capital loss harvesting makes sense with the other income, losses,
any positions should be liquidated
and deductions that will be reported on your tax return
to realize losses. The proceeds
• If the investment sold will be replaced and how the new cost basis and
holding period will work with your overall wealth management strategy can be reinvested in a company
• Wash-sale loss rules to ensure the loss reported will not be disallowed either in the same sector or an
• The effect of capital loss harvesting on dividend distributions and exchange-traded fund (ETF)
transaction fees covering that sector while you
wait for the 30-day wash-sale
Rebalance your investment portfolio
rule to expire.
With volatility in the market, it is important to review your investment portfolio
to determine if rebalancing is necessary to maintain your desired asset allocation.
You may have some or all of your accounts set up to automatically rebalance. Exchange-traded funds (ETFs) are
However, if you do not have automatic rebalancing, it is important to review subject to risks similar to those of stocks.
your entire portfolio, both taxable accounts and assets held in tax-advantaged Investment returns may fluctuate and
accounts (such as your IRA and 401(k) accounts). are subject to market volatility, so that
Your tax-advantaged accounts may have limitations; for example, many 401(k) an investor’s shares, when redeemed,
plans may not provide fund selections to allow allocations to international or sold, may be worth more or less than
fixed income, real assets, or complementary strategies. When rebalancing, pay their original cost. Exchange-traded
attention to the wash-sale rule, as it can still be triggered if you sell a security at funds may yield investment results that,
a loss and repurchase a substantially identical security within your IRA or tax- before expenses, generally correspond to
advantaged account. the price and yield of a particular index.
There is no assurance that the price and
Avoid purchasing new mutual funds with large expected yield performance of the index can be
capital gains distributions fully matched.
Like other types of securities, you realize capital gains on your mutual fund
holdings when you sell them. However, a unique feature of mutual funds is
their potential annual distribution of capital gains (and losses) to shareholders.
Companies that manage mutual funds announce the amount of capital gains to
be distributed to shareholders near the end of the year.
The announcement includes a record date (the date of record for shareholders
to receive a distribution) and an ex-date (the date the security trades without
the distribution) and is typically expressed as a percentage of shareholders’
position (for example, a 10% distribution would equal a $10 distribution
on a $100 investment).
PAGE | 122020 TAX PLANNING GUIDE
For investors looking to rebalance their portfolios, mutual fund distributions Remember, when executing
can be problematic. A rule of thumb is that you typically don’t want to buy into
transactions intended to affect
capital gains distributions. For example, if you sell an asset in your portfolio that
has performed well, you expect to realize capital gains. You could exacerbate your your tax bill, the trade date—not
capital gains issue by reallocating your rebalanced proceeds to a new mutual fund the settlement date—determines
near the date of its annual capital gains distribution.
the holding period for most
There are risks associated with investing in mutual funds. Investment returns
transactions. This will in turn
fluctuate and are subject to market volatility, so that an investor’s shares, when
redeemed or sold, may be worth more or less than their original cost. determine whether an asset is
held long-term or not.
Wash-sale rules
A wash sale occurs when a security is sold at a loss and the same security, or
a substantially identical security, is purchased within 30 days before or 30
days after the sale date. When a wash sale occurs, the loss recognized from the
transaction is disallowed and is unable to be used to offset other gains. Instead,
the amount of the disallowed loss will be added to the basis of the repurchased
securities. The rule was developed to prevent investors from selling securities for
the sole purpose of creating a deductible loss or using the loss to offset
other gains.
A wash sale can be avoided by purchasing the identical security more than 30
days before the loss sale or more than 30 days after the loss sale. A security
within the same sector but that is not substantially identical may be purchased
at any time before or after the loss sale and will not trigger a wash sale.
PAGE | 132020 TAX PLANNING GUIDE Qualified Opportunity Zones PAGE | 14
2020 TAX PLANNING GUIDE
The TCJA of 2017 introduced the Qualified Opportunity Zone (QOZ) program, Generally, any QOF investment made
providing a tax incentive for private, long-term investments in economically in 2020 will not be held long enough to
distressed communities. You may elect to defer tax on any capital gains invested qualify for the additional 5% step-up.
in a Qualified Opportunity Fund (QOF), defined as an entity that is organized as However, a 2020 investment could still
qualify for the 5% step-up if the gain arises
a corporation or partnership and that subsequently makes investments in QOZ
from a pass-through entity’s capital gain
property. You must invest in the QOF within 180 days of the realization event.
(for example, a partnership, S corporation,
If you make the investment, you could potentially receive three valuable tax
or trust).
benefits:
The rules surrounding this option are
1. The capital gains invested in the QOF are not recognized until the earlier of
complicated and require precision. This
the QOF sale or December 31, 2026. option should be discussed with your tax
2. You may be able to reduce the amount of gain. If you retain your investment advisor early in 2020.
in the QOF for five years, you will be able to exclude 10% of the gain from
eventual recognition. If the money is kept in the QOF
for seven years, you receive an additional 5% gain exclusion for a maximum In order to provide these
of 15% gain exclusion on the original sale. As the new capital gain realization substantial tax benefits, money
date is
must remain in the QOF for at
December 31, 2026, in order to obtain the full 15% exclusion, the QOF
investment generally needed to be made before December 31, 2019. least 10 years. As such, discuss
3. You may be able to exclude all future capital gains on the sale of QOF. If you with your advisor how these
retain your QOF for at least 10 years and then sell your interest, you can vehicles impact other areas of
exclude 100% of the capital gain. Thus, if you invest in a QOF on December 1,
your overall financial strategy
2019, and sell the QOF on December 2, 2029, you
will pay no capital gain tax on the entire appreciation including, but not limited to,
of the QOF. cash flow planning and your
These tax savings opportunities are only available if you retain your investment investment risk tolerance.
in the QOF for the noted timeframes. A sale of the QOF before the noted dates
will accelerate any deferred capital gain to that date and you may lose some of
the benefits.
PAGE | 152020 TAX PLANNING GUIDE
Education planning
529 plans Funding opportunity for education
Donors can also elect to make five years’
• Earnings accumulate tax-deferred; qualified withdrawals (such as tuition, fees, worth of annual exclusion amounts in a
supplies, books, and required equipment) may be free of federal income taxes. single year’s contribution, up to $75,000
• There are no income, state-residency, or age restrictions. (single) and $150,000 (married). For
example, a couple with twins could fund
• Potential state-tax incentives are available in some states.
$150,000 for each child after birth and let
• These are typically funded up to the annual exclusion amount, $15,000 (single) those funds grow tax-free until needed.
or $30,000 (married) per year per donee. Contributions in excess of annual
Accessing 529 plan considerations
exclusions should be filed on a gift tax return (Form 709) to report use of the
donor’s available lifetime exclusion or the election to superfund five years’ worth While the expansion of benefits under
of annual contributions (see below). Most plans allow for contributions by people 529 plans for early education may sound
other than the original donors, such as aunts/uncles, grandparents, friends, etc. exciting, taxpayers may find it more
advantageous to leave the 529 plan
• Aggregate contribution limits vary by state—roughly $200,000 to $500,000 per account untouched in order to grow tax-
beneficiary. free during the primary education years
• Elementary and secondary school expenses of up to $10,000 per year are and instead use the 529 plan for college
qualified education expenses for federal tax purposes. This flexibility may allow and post-graduate studies.
earlier access for private tuition prior to college. However, not all states conform The CARES Act and student loans
to this definition of qualified expenses, so check with your tax advisor and
The CARES Act suspended certain student
confirm your state rules before taking a distribution for this purpose.
loan payments and accrual of interest
• If a plan is overfunded due to your child (or whoever the plan was set up for) through September 30, 2020. Employers
not having enough (or any) qualifying education expenses, you can change the may make student loan payments on
plan beneficiary so long as the new beneficiary is a family member of the old behalf of employees (up to $5,250) with
beneficiary (a sibling, spouse, parent, etc.). the amount excluded from employee
income.
‒‒ If a plan is overfunded, the donor can still access those tax-deferred funds; this
growth may outweigh applicable income taxes and penalties on distributions
not used for education because 529 plans do not have a “use by” age
Please consider the investment
requirement.
objectives, risks, charges, and expenses
• The SECURE Act further expanded the definition of qualified higher education carefully before investing in a 529
expenses to include expenses for apprenticeship programs and qualified savings plan. The official statement,
education loan payments: which contains this and other
‒ Eligible apprenticeship program expenses include fees, books, supplies, and information, can be obtained by calling
required equipment. your relationship manager. Read it
carefully before you invest.
PAGE | 162020 TAX PLANNING GUIDE
‒‒ Qualified education loan payments are distributions American Opportunity Credit
that may be used to pay the principal and/or interest
on qualified education loans. Limited to a lifetime Maximum credit: $2,500 per student per year, for first four
maximum amount of $10,000 per person. years of qualified expenses paid
‒ This change is effective retroactively to the beginning
MAGI phase-outs
of 2019.
Married filing jointly $160,000–$180,000
Single filer $80,000–$90,000
Education Savings Accounts (ESAs)
• Maximum nondeductible contribution is $2,000 per child Up to 40% ($1,000) of the American Opportunity Credit is
per year. refundable. This means that even if your tax bill is zero, you
can receive a refund of up to $1,000.
• Must be established for the benefit of a child younger than
the age of 18.
Lifetime Learning Credit
• Maximum contribution amount is reduced if a
contributor’s MAGI is between $95,000 and $110,000 for Maximum credit: 20% of the first $10,000 (per tax return)
individual filers or $190,000 and $220,000 for joint filers. of qualified expenses paid in 2020
• No contributions can be made if the contributor’s MAGI
MAGI phase-outs
exceeds the stated limits or the beneficiary is age 18 or
Married filing jointly $118,000–$138,000
older (except for special needs beneficiaries).
Single filer $59,000–$69,000
• Interest, dividends, and capital gains grow tax-deferred and
may be distributed free of federal income taxes as long as
the money is used to pay qualified education expenses.
Exclusion of U.S. savings bond interest
• Funds must be used before age 30 or transferred to a MAGI phase-outs
family member under the age of 30 (except for special Married filing jointly $123,550–$153,550
needs beneficiaries). Others $82,350–$97,350
• A prior advantage of ESAs over 529s was the ability to
Bonds must be titled in name(s) of taxpayer(s) only. Owner must be age 24 or older at time of
use an ESA for private elementary or secondary school issue. Must be Series EE issued after 1989 or any Series I bonds. Proceeds must be used for
tuition. This advantage has been minimized now that 529 qualified post-secondary education expenses of the taxpayer, spouse, or dependent.
plans offer similar distributions and permit higher funding
contributions, which are not phased out by the donor’s Student loan interest deduction
income level.
Maximum deduction: $2,500
MAGI phase-outs
Married filing jointly $140,000–$170,000
Others $70,000–$85,000
PAGE | 172020 TAX PLANNING GUIDE
Kiddie tax
Children with investment and other unearned income, such as dividends and capital gains, exceeding
$2,200 may be subject to the kiddie tax rules. These rules apply to children age 17 and under, those
that are 18 with earned income not exceeding half of their support, and those that are over 18 and
under 24 if also full-time students with earned income not exceeding half of their support. Parents
can elect to report this unearned income on their own return using Form 8814 for amounts less than
$11,000. While doing so may be simpler, it may not be necessarily more tax efficient. The kiddie tax
applicable to a child’s unearned income of $10,000, for example, may be less than when claimed by a
parent already subject to top tax rates.
Starting in 2020, the SECURE Act returns the kiddie tax rules to what they were prior to passage
of the TCJA of 2017. In 2020, unearned income of children is taxed at the child’s parent’s marginal
tax rate instead of the trust and estate tax rates. While this change is effective for 2020, taxpayers
may elect to apply the changes for the tax year that began in 2018, 2019, or both. For children with
substantial unearned income, there could be significant tax savings. If beneficial, an amended return
can be filed for 2018 and 2019.
Taxable income Tax
Over But not over Pay + % on excess Of the amount over
$0 $2,600 $0 10% $0
$2,600 $9,300 $260 24% $2,600
$9,300 $12,750 $1,868 35% $9,300
$12,750 $3,075 37% $12,750
PAGE | 182020 TAX PLANNING GUIDE
Retirement accounts
401(k), 403(b), 457, Roth 401(k), or Roth 403(b)
Employee maximum deferral contributions $19,500
Catch-up contribution (if age 50 or older) $6,500
Combined limit for Roth 401(k) or Roth 403(b) and before-tax traditional 401(k) or before-tax 403(b) deferral contributions is $19,500 for those younger than 50.
Traditional and Roth IRAs
Maximum contribution $6,000
Catch-up contribution (if age 50 or older) $1,000
2020 contributions must be made no later than the tax-filing deadline, regardless of tax extensions.
Traditional IRA deductibility limits
If neither individual nor spouse is a participant in another plan: $6,000 maximum deduction1
If the individual is an active participant in another plan:
Married/joint MAGI Single MAGI Deduction
Up to $104,000 Up to $65,000 $6,0001,2
$104,001–$123,999 $65,001–$74,999 Phased out
$124,000 and over $75,000 and over $0
1
If a spouse (working or nonworking) is not covered by a retirement plan but his or her spouse is covered, the spouse who is not covered is allowed full deductibility
up to $196,000 joint MAGI, phased out at $206,000 joint MAGI.
2
Maximum deduction is $7,000 if age 50 or older.
Note: Phase-out for married filing separately is $0–$10,000.
Roth IRA qualifications
• Contribution amount is limited if MAGI is • Cannot contribute if MAGI exceeds limits
between: • Contributions are not tax-deductible
‒ $124,000 and $139,000 for individual • Contributions are allowed after the age of 70½
returns* if made from earned income
‒ $196,000 and $206,000 for joint filers • Contributions, but not earnings, can always
‒ $0 and $10,000 for married filing separately be withdrawn at any time, tax-free and
penalty-free
* Includes single filers, head of household, and married filing separately if you did not live with your spouse at any time during the year.
PAGE | 192020 TAX PLANNING GUIDE
Retirement plan limits The SECURE Act impact
Maximum elective deferral to SIMPLE IRA and The SECURE Act, which was signed into law on December 20,
$13,500
SIMPLE 401(k) plans 2019, was the largest piece of retirement legislation in over a
Catch-up contribution for SIMPLE IRA and decade. A number of the key provisions will start impacting
$3,000
SIMPLE 401(k) plans (if age 50 or older)
individuals as early as January 1, 2020. A few of the significant
Maximum annual defined contribution plan limit $57,000
changes include:
Maximum compensation for calculating
$285,000
qualified plan contributions
• Increase in the RMD age. Although not a factor in
Maximum annual defined benefit limit $230,000
2020 due to the CARES Act waiving RMDs in 2020,
Threshold for highly compensated employee $130,000
the SECURE Act raises the RMD age from age 70½ to
Threshold for key employee in top-heavy plans $185,000
age 72. This affects individuals turning age 70½ after
Maximum SEP contribution is lesser of limit or
25% of eligible income
$57,000 December 31, 2019. Individuals who reached age 70½ on
or before December 31, 2019, must start and/or continue
taking RMDs at age 70½. Individuals turning 70½ after
The CARES Act impact December 31, 2019, can delay taking their first RMD until
The CARES Act, signed into law on March 27, 2020, April 1 of the year following the year they turn age 72.
impacts both retirement plan distributions and loans: • Inherited IRAs, limitation of the stretch IRA
• Required minimum distributions (RMDs) are waived for provisions. Under the previous law, RMD rules for an
2020 from IRAs and certain defined contribution plans. inherited IRA allowed a designated beneficiary to receive
distributions over his or her life expectancy. Under the
• For those under age 59½, distributions from qualified
SECURE Act, a beneficiary who inherits an IRA in 2020
retirement plans and IRAs during 2020 of up to $100,000
and thereafter must withdraw the funds from the IRA
for COVID-19-related purposes are allowed without
within 10 years of the IRA account holder’s death.
a 10% penalty and are taxable evenly over three years
beginning in 2020. ‒‒ For certain designated beneficiaries, the 10-year rule
will not apply. Exceptions are made for spouses, disabled,
‒‒ Tax on these distributions may be avoided if the amount
or chronically ill beneficiaries, individuals not more
is fully recontributed within three years.
than 10 years younger than the decedent, and certain
‒‒ Related purposes include a COVID-19 diagnosis for you, minor children.
your spouse, or dependent, or if you are experiencing
‒ The 10-year rule applies to both individual IRAs
financial hardship as a result of layoff, furlough, reduction
and Roth IRAs as well as defined contribution
of work hours, or lack of child care.
retirement plans.
PAGE | 202020 TAX PLANNING GUIDE
• Repeal of maximum age for traditional IRA contributions. The SECURE The CARES Act and required minimum
Act repeals the restriction that previously prevented contributions to distributions (RMDs)
traditional IRAs by an individual who has reached age 70½. Now, as long as an In most years, you are required to take
individual has earned income, there is no age limitation on the ability to make distributions from your retirement
contributions to a traditional IRA; however, that contribution is still subject to accounts. In 2020, that requirement would
the same rules regarding whether your contribution will be tax deductible. have started no later than April 1 in the
year after you turn 72 (updated from 70½
Consider converting your eligible retirement account per the SECURE Act). However, the CARES
Act waives RMDs from IRAs and certain
to a Roth IRA
defined contribution plans (such as 401(k),
Benefits of converting your eligible retirement account—401(k), traditional IRA, 403(b), or 457 accounts) for 2020. If you
or other non-Roth account—to a Roth IRA can include tax-free withdrawals for turned 70½ in 2019 and you planned on
you and your heirs and the elimination of RMDs during your lifetime and those taking your first RMD by April 1, 2020, you
are not required to take that distribution
of your spouse (if treated as his/her own Roth IRA). RMDs will be required for
either.
non-spouse beneficiaries, but tax-free withdrawals will still apply for qualified
distributions. Another benefit of converting your eligible retirement accounts is Although there has been a waiver on 2020
that the amount that is converted to a Roth IRA can be withdrawn tax-free and RMDs, you may still wish to consider
penalty-free after a five-year waiting period, even if you are younger than 59½. making a qualified charitable distribution
(QCD) from your retirement account as an
Conversion is not an all-or-nothing proposition, as you can convert a portion
option to support a charitable organization
or all of your eligible retirement account. Note that a Roth IRA conversion will
during this time of uncertainty. Taxpayers
trigger ordinary income in the year of conversion and potentially the Medicare
over 70½ are eligible to make a QCD and
surtax, as the conversion counts toward the calculation of modified adjusted
would not recognize that distribution in
gross income. gross income. Making a QCD will reduce
To determine if you may benefit from this strategy, we recommend working the value of your retirement account,
with your tax advisor to determine all potential federal and state income tax thereby reducing your RMDs in future
and estate tax implications. Please note that in past years, one could change years. This is an option for you even if you
their mind and reverse the recharacterization until October of the following year. do not itemize your deductions.
Under the TCJA, reversing the conversion is no longer an option.
If you have significant income resources to sustain your lifestyle for the rest of
your life without using your traditional IRA, consider a Roth IRA conversion.
A traditional IRA forces withdrawals through RMDs regardless of individual
circumstances, whereas a Roth conversion eliminates RMDs entirely. In this way,
taxpayers can leave the full balance of the Roth IRA to their heirs, undiminished
both by income taxes (income tax is paid when completing the conversion) and
forced withdrawals (RMDs) during the taxpayer’s own lifetime. Keep in mind that
with the passage of the SECURE Act, funds in an inherited Roth IRA will have to
be distributed to beneficiaries within 10 years. Although the distribution is not
taxable, the impact of this change should be taken in to consideration.
PAGE | 212020 TAX PLANNING GUIDE
Inherited IRA distributions If you and your advisors have
Qualified charitable distributions (QCDs) can be made from an inherited IRA as
determined that a Roth conversion
well; it will just be reported as a death distribution to the IRS. You must be 70½ or is the right fit for you due to
older to make a QCD, even if it is from an inherited IRA. current market volatility and
Tax-efficient charitable gifting decline in market values, now may
be a good time to facilitate the
The most tax-efficient beneficiaries of qualified plan assets (which receive no
income tax basis step-up at death) are charities because they are tax-exempt for conversion. The depressed value
income tax purposes. As an example, designating a charity as your $100,000 IRA means the tax on the conversion
beneficiary (not subject to income taxes) and bequeathing your $100,000 stock
is also lower and again, any future
portfolio to a child transfers the full $200,000 with $0 income taxes to the IRS.
On the other hand, designating a child as your $100,000 IRA beneficiary (subject distributions will be tax-free. It is
to income taxes) and bequeathing a $100,000 stock portfolio to charity transfers important that you have assets
less because your child will have to pay the income taxes on the $100,000 IRA.
outside of the IRA to pay the taxes.
PAGE | 22 PAGE | 222020 TAX PLANNING GUIDE Social Security PAGE | 23
2020 TAX PLANNING GUIDE
Social Security and Medicare taxes
Contact your tax advisor for guidance on the most current Social Security and Medicare tax rates in
effect during 2020.
Maximum wage base for Social Security $137,700
Earnings test
The earnings test indicates the level of earnings permissible for Social Security recipients without
incurring a deduction from benefits. These limits are indexed to increases in national earnings.
Worker younger than full retirement age $18,240
Year worker reaches full retirement age (applies only to earnings for months prior to attaining
$48,600
full retirement age)
Worker at full retirement age No limit
Maximum monthly benefit: $3,011
This benefit is for an individual who reaches full retirement age in 2020 and earns at least the
maximum wage base amount for the best 35 years of work.
Information provided by the Social Security Administration.
Taxation thresholds
Up to a certain percentage of an individual’s Social Security benefits is subject to taxation when his or
her provisional income1 exceeds certain threshold amounts:
Up to 50% taxed Up to 85% taxed
Married filing jointly $32,000–$44,000 More than $44,000
Single $25,000–$34,000 More than $34,000
Married filing separately 85% taxable 2
1
Provisional income generally includes modified adjusted gross income (MAGI) plus nontaxable interest and one-half of Social Security benefits.
2
There is an exception to this rule if you lived apart from your spouse for the entire year. Consult your tax advisor for more information.
PAGE | 242020 TAX PLANNING GUIDE
Charitable
contributions
Congress recognized that the doubling of the standard deduction under the TCJA In addition to bunching together
of 2017 would effectively eliminate the ability of many taxpayers to obtain a donations, donor advised funds (DAFs)
benefit for their charitable contributions, potentially causing many taxpayers to are another way to take advantage of
give less. To counteract this, a change was made to increase the adjusted gross deductions. The irrevocable contribution
you make to a DAF is deductible in the
income (AGI) limitation for cash contributions to a public charity from 50% to 60%.
year you fund it, but distributions to
In 2020, this limitation has been waived under the CARES Act. This waiver does
charitable organizations can be spread
not apply to contributions to private foundations or donor advised funds. This
over multiple years.
may encourage more high-net-worth individuals to increase their giving, helping
charities recover lost revenue.
Although the AGI limitation for cash contributions is 60%, it is important to This can be useful when you are
consider donating appreciated property. If you donate appreciated property that
able to make a donation but
has been held for at least one year, you are eligible to deduct the fair market value
without paying income tax on the unrealized gain. However, you can only deduct have yet to determine the timing
up to 30% of your AGI when making these gifts of long-term capital gains property of the distributions out of the
(to a public charity). Being able to avoid the payment of taxes on the unrealized
DAF or what charities will receive
gain combined with the charitable contribution deduction may produce a better
tax result. the gift.
When considering charitable gifting and capturing potential tax deductions, review
your tax situation and carefully determine which assets to give. Gifts made to
qualified, tax-exempt organizations are generally deductible but are subject to
limitations based on the type of organization (public or private), the asset being
gifted, and your AGI. Charitable contributions that are not deductible in the current
year due to AGI limitations can be carried forward for up to five years.
Gifts made via check or credit cards are considered deductible if the check
is written and mailed or the charge to the credit card posts on or before
December 31. Gifts of stock are considered complete on the date the brokerage
firm transfers title, which can take several business days (or the date the taxpayer
can substantiate permanent relinquishment of dominion and control over the
stock), so be sure to plan these types of transfers well before December 31. Also,
remember to obtain and keep receipts and be aware of any value received for goods
or services that may reduce the value of any tax deduction.
PAGE | 252020 TAX PLANNING GUIDE Take advantage of charitable deductions The higher standard deduction combined with limits on other deductions means fewer people will be able to deduct their charitable contributions. An option to get a deduction is to make direct gifts and bunch your donations together into one year. For example, instead of making contributions in December 2020, you can make your 2020 contributions in January 2021. Making your 2021 contributions later during the year might give you enough to itemize in one calendar year. You could then take the standard deduction the following year, when you don’t make contributions. Under the CARES Act, an above-the-line deduction for cash charitable contributions of up to $300 is allowed for taxpayers who take the standard deduction. PAGE | 26
2020 TAX PLANNING GUIDE Long-term care deduction for policy premiums For specific qualified long-term care policies, the premiums are considered to be a personal medical expense and deductible by the IRS. The amount of qualified long-term premiums that will be considered a medical expense are shown on the table below.* The medical expense deduction is limited to qualified medical expenses over 7.5% of adjusted gross income. Age before the close of the taxable year Limit on premiums eligible for deduction 40 or less $430 Over 40 but not over 50 $810 Over 50 but not over 60 $1,630 Over 60 but not over 70 $4,350 Over 70 $5,430 * Limitations apply based on the type of taxpayer. You should consult your tax advisor regarding your situation. PAGE | 27
2020 TAX PLANNING GUIDE
Real estate investors
As a real estate investor, you may expense 100% of new and used qualified Consider aligning titling of real estate
tangible business property acquired and placed in service during 2020. In assets based on usage
addition, the expense limitations (that is, Section 179 election) relating to the Due to these changes, taxpayers should
cost of certain depreciable tangible personal property used in a rental business as consider whether certain real estate
well as certain nonresidential real property improvements is $1,040,000, and the properties should continue to be used as
phase-out is $2,590,000. Real estate investors can use Section 1031 exchanges a personal asset. If the taxpayer uses the
for real estate used in a trade or business, but Section 1031 cannot be used for property in a real estate trade or business
personal property or real property held primarily for sale. (for example, renting the property), the
real estate tax and mortgage interest
The deduction for real estate taxes for personal use real estate is now limited
deduction limitations no longer apply.
to $10,000. This limitation includes state and local income taxes as well.
These deductions, while limited for
The mortgage interest deduction is limited to the first $750,000 in mortgage
personal assets, are still fully deductible
indebtedness on primary and secondary residences. Only mortgages originating
for real estate assets used in a trade or
before December 15, 2017, can continue to use the old $1,000,000 mortgage
business.
balance limitation. Finally, home equity loans and home equity lines of credit
that are not used to either acquire or improve a primary or secondary residence
are not deductible.
Owners of real estate entities
Generally, income from real estate activities is considered a passive activity. As
established as pass-through
such, if a property operates at a loss, the loss is only deductible against other
passive income, or if the property’s activity is disposed during the year. Only real businesses, such as sole
estate professionals who provide greater than 750 hours of personal services in proprietorships, LLCs taxed as
real property trades and spend more than half of their time in real estate trade or
partnerships, partnerships, or S
businesses can fully deduct their losses from real property activities. As the rules
can frequently be based on facts and circumstances, taxpayers should consult corporations, may be able to take
their tax advisor to confirm the proper deductibility of these activities. advantage of the 20% qualified
business income deduction
against the owner’s share of
taxable rental income, subject to
certain limitations. Regulations
indicated that real estate
operated in a trade or business
could qualify for the deduction.
PAGE | 282020 TAX PLANNING GUIDE Health savings account (HSA) limits Health savings accounts (HSAs) are available to participants enrolled in a high-deductible health insurance plan. Contributions to HSAs are fully tax-deductible (or are made entirely from before-tax dollars), meaning they are not subject to federal taxes and state taxes as well as Social Security and Medicare taxes (commonly referred to as FICA taxes). Income earned inside HSAs is tax-deferred and distributions are tax-free as long as they are used for qualified medical expenses. If a distribution occurs from an HSA prior to age 65 for reasons other than qualified medical expenses, ordinary income taxes along with a 20% penalty are due on the distribution amount. Distributions from HSAs after age 65 are not subject to the 20% penalty but are subject to ordinary income taxes. Contributions to HSAs can no longer be made after enrolling in Medicare (eligibility for Medicare begins at age 65). Maximum contribution Single $3,550 Family $7,100 $1,000 catch-up contribution allowed per individual age 55 or older. Minimum health insurance plan deductible Single $1,400 Family $2,800 Maximum out-of-pocket expenses Single $6,900 Family $13,800 PAGE | 29
2020 TAX PLANNING GUIDE
Federal trust
and estate
income tax
Tax rates
Taxable income Tax
Over But not over Pay + % on excess Of the amount over
$0 $2,600 $0 10% $0
$2,600 $9,450 $260 24% $2,600
$9,450 $12,950 $1,904 35% $9,450
$12,950 $3,129 37% $12,950
PAGE | 302020 TAX PLANNING GUIDE
Estate and gift tax
Applicable exclusion: $11,580,000 Take advantage of the temporary
exemption increase
The applicable exclusion is the value an estate must exceed before it will be The $11,580,000 lifetime exclusion amount
subject to taxation. Portability rules allow an executor to elect to transfer any is approximately double the prior figure of
unused exclusion to a surviving spouse. Consult your tax and legal advisors to $5,000,000 (adjusted for inflation). Because
determine the appropriate strategy for applying the portability rules. this generous exclusion is temporary and
expires on December 31, 2025 (or perhaps
Estate tax rate: 40% earlier depending on legislative changes),
you should be thinking about how to take
The estate tax rate is 40% for any amount exceeding $11,580,000 (or exceeding advantage of this window of opportunity
$23,160,000 for married individuals). before it expires. If you do not use it before
expiration, you may lose it. The exclusions
Generation-skipping tax exemption: $11,580,000 are used by either making lifetime gifts or
passing away before the exclusion reverts to
Gift tax annual exclusion: $15,000 old levels. For example, a married couple that
fails to lock in the increased exemption with
Each individual may transfer up to $15,000 per person per year to any number lifetime gifts may effectively add roughly
of beneficiaries (family or nonfamily) without paying gift tax or using up any $4,000,000 to their heirs’ estate tax liability.
available lifetime gift exclusion. For individuals who have already engaged
in gifting (many individuals with taxable
Explore wealth transfer opportunities estates gifted assets in advance of the
2011 and 2013 estate tax law changes), the
While minimizing transfer taxes is a factor, often we find a client’s main concern
additional lifetime exclusion amount allows
is making sure assets pass effectively and efficiently, fulfilling his or her wishes
taxpayers to consider new gifting strategies.
and the needs of beneficiaries. There are actions you can take this year to For married individuals with estate planning
potentially reduce your future estate tax liability and to maximize your lifetime documents, the technical language within
gifting. wills or trusts may need to be revisited
You can give $15,000 every year to as many people as you like without paying and evaluated considering the existing
a gift tax or using up any of your $11,580,000 lifetime exclusion, as long as you exemption amount. It would be prudent to
initiate contact with your estate planning
do it before the end of each year. Medical and education expenses paid on behalf
attorney to discuss your estate value and
of anyone directly to the institution are excluded from taxable gifts and are
existing estate planning documents.
unlimited in amount (as are charitable gifts).
Although simple gifts and transfers mentioned here can reduce taxable estates,
they are fairly basic techniques, and clients are sometimes reluctant to use them
due to a lack of control and concerns about access once gifts are made.
PAGE | 312020 TAX PLANNING GUIDE
Typically, families with significant taxable estates are strategic about how best Additionally, many taxpayers
to use the annual exclusion and their lifetime exclusion gifting by utilizing
reside in states that have their
advanced strategies such as irrevocable trusts (e.g., Grantor Retained Annuity
Trusts, Intentionally Defective Grantor Trusts, Qualified Personal Residence own death, estate, or inheritance
Trusts, Charitable Remainder Trusts, etc.), transfers of interests in entities taxes. This should also be
(Family Limited Partnerships and Limited Liability Companies), and other
reviewed with your attorney
planning techniques. Modern planning techniques are increasingly flexible and
provide mechanisms to protect your beneficiaries while allowing you options to see if additional planning
for maintaining your own desired lifestyle. Given the market volatility and can minimize or eliminate
low interest rates at time of publication, these strategies may be that much
state estate taxes or if any
more impactful at this time. As with any strategy, there are risks to consider
and potential costs involved. Discussions with your advisors can help in the adjustments need to be made to
education of how these strategies work, and the role that depressed valuations existing planning as a result of
and low rates can play.
the discrepancy between state
A modern wealth planning approach should be holistic, incorporating income
and federal estate taxes.
tax planning considerations, asset protection, business succession planning,
and family dynamics considerations (not just minimizing transfer taxes). Before
implementing any wealth transfer option, you should consider the trade-offs
between lifetime transfers and transfers at death.
Lifetime transfers usually result in the beneficiary assuming the tax basis in
the gifted asset equal to that of the donor at the time of the gift. This could
result in any built-in appreciation being taxed to the beneficiary when he or she
ultimately sells the property, although any gift or estate tax on such appreciation
is usually avoided from the perspective of the donor.
In contrast, if the transfer occurs at death, the beneficiary generally assumes the
tax basis equal to the fair market value at that time, eliminating any income tax
on the built-in appreciation. However, income tax savings on the asset may be
offset by any estate tax imposed on the asset. Proper planning with your tax and
other advisors should consider the trade-off between income and estate taxes
and help you maximize your results over the long term. The right strategies to
use will vary with the goals, assets, and circumstances of each family.
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