This content has been archived. It may no longer be relevant
No one knows who will win the presidential election or how Congress will adjust the tax code in 2021 and beyond. That makes it that much more important that investors take advantage of year-end tax strategies now.
Most of our toys have been taken away over the last couple of decades by tax legislation, so there’s not much that’s left. But existing tax law and the CARES Act of 2020, enacted in response to Covid-19, does offer a few opportunities that are worth considering.
One bright spot is charitable donations. Even taxpayers who don’t itemize their deductions are allowed to deduct up to $300 in cash charitable donations. Clients that do itemize can deduct up to 100% of adjusted gross income (AGI) for cash contributions.
If you took a coronavirus-related distribution from your IRA or 401(k), Congress and the IRS gave you some wiggle room. The CARES Act stipulates that while the coronavirus-related distribution is taxable as ordinary income, clients can pay the tax over three years. You don’t have to pay the entire tax with your 2020 tax return.
According to the IRS website, “A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.”
The account owner, their spouse or their dependents must have been diagnosed with the coronavirus or hurt financially by the pandemic. This includes parents who couldn’t work because day cares weren’t open.
You also have the option to pay back the money within three years and can file amended tax returns to recoup the tax already paid. Coronavirus distributions are exempt from the 10% penalty that typically applies to early withdrawals.
Another CARES Act opportunity—though it comes with a caveat—involves student loans. The law suspended student loan payments for at least a year and also waived interest on loans, so borrowers are not required to make payments and aren’t getting hit with interest. But any payments you do make will be applied 100% to principal, so if you have the means you may want to consider making loan payments now so 100% will come off your balance, which is not normally the case.
There are also a number of perennial tax moves, especially in the estate planning arena, which may become much more valuable if presidential candidate Joe Biden wins the White House. Biden wants to end the stepped-up basis loophole, which allows someone inheriting property and investments to reduce capital gains taxes. This could have an impact on anyone who thinks they will have a big inheritance coming their way in the future, and it will certainly mean people need to take another look at their estate plan if they’re planning on leaving significant assets to friends and family.
One way to avoid this possibility is to take advantage of the IRS’s gifting rules now: These allow a taxpayer to gift up to $15,000 per person each year without triggering a gift tax.
If clients want to give money to someone and they have the resources, and if they want to avoid higher estate taxes in the near future, they and their spouse can each give $15,000 tax free for a total gift of $30,000 per recipient. If the person is married he or she can give a total to their spouse as well, and together that means $60,000 goes to their household without triggering taxes.
If you do the same thing in January, that’s $120,000 you’re able to gift to them, all without gift taxes. There’s no tax deduction for these gifts, but it could help with estate planning.
Under current law, the lifetime gift tax exemption allows each taxpayer to gift up to $11.58 million, up from $11.4 million in 2019, without having to pay a gift tax to the IRS. Married couples are able to transfer assets of $23.16 million without incurring federal tax.
On January 1, 2026, however, those exemptions are set to revert to $5.6 million per person as a result of sundown exemptions that will expire and result in significantly lower tax-free gifting limits.
A number of tax experts don’t think the wealthy should count on the higher exemptions lasting until 2026, since Congress will likely look for tax revenue to shore up a pandemic-strapped economy and mounting shortfalls.
There will be lots of new tax laws over the next six years. If you’re wealthy, this will be an issue.
Also take a look at harvesting unrealized losses in stock portfolios. Due to volatility of the market, you may have investments that are down in value from January 1. Selling those assets can help them either offset gains in other assets or create a tax deduction for those losses. Clients can reduce their gains by amount of losses and claim up to $3,000 in excess losses on this year’s tax returns. Any losses beyond that, one can apply to prior years, through amended returns, or apply the losses to future years.
Also recommended that taxpayers make sure, if possible, that they contribute the maximum allowable to workplace retirement plans and IRAs in order to get their full deduction this year, since a Biden White House plans to substitute a tax credit for the deduction.
The caveat for deductions? If you received unemployment benefits, which 30 million Americans did, that income is taxable but not eligible for purposes of calculating.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
