Election Day Tax Planning Letter
Dear BMSS Clients and Friends,
With the end of 2020 approaching, you may be considering year-end tax planning strategies. Year-end tax planning always presents uncertainties over possible tax law changes in future years, but the uncertainty is particularly pronounced in a presidential election year. BMSS recently sent to you a Bloomberg Tax & Accounting comparison of the tax plans that have been proposed by the candidates. After today’s election, we will provide additional analysis and implications for year-end tax planning based on the results in the presidential and congressional races.
In spite of the uncertainty, this letter covers tax planning strategies that you might want to consider for 2020. Some of these opportunities were included in COVID relief legislation passed by Congress earlier this year. Final implementation of any of these strategies can be decided upon after the election, but awareness and preliminary consideration might be beneficial for you.
Roth IRA Conversions
Considering whether to convert your traditional IRA to a Roth IRA can be a tax planning strategy that can allow future earnings to be tax free. If you convert a traditional IRA to a Roth IRA, you will have to pay tax on the converted funds, but once converted, all qualifying Roth distributions, including future earnings, are tax free. Present and future tax rates, as well as remaining number of years before planned distributions, are key in your decision on whether a Roth conversion makes sense. We can assist in your analysis.
The CARES Act waived required minimum distributions for 2020. This presents a onetime opportunity for those subject to the minimums to convert RMDs instead to Roth IRAs.
Retirement Plan Distributions
2020 presents a unique opportunity for taxpayers to take distributions from 401k plans and IRAs due to COVID-19. If the taxpayer meets certain requirements, the distributions, up to a combined limit of $100,000 from all retirement plans, are not subject to the 10% additional tax on early distributions and may be included in taxpayer’s taxable income over a three-year period, one third each year, beginning the year the distribution is received.
Section 2205 of the CARES Act has increased the limit for charitable cash contributions from 60% to 100% of AGI. This increase to the AGI limitation only applies to cash contributions. Any cash gifts in excess of the limit can be carried forward for five years. Contributions to non-operating private foundations or donor-advised funds are not eligible for the 100% AGI limitation.
Capital gain and loss transaction planning should always be considered in year-end planning. Discretional gain and loss harvesting strategies for 2020 may be affected by the election results and the winning candidate’s tax policy. Under current law, capital gains are taxed at different rates depending upon the taxpayer’s taxable income. If you hold capital assets for longer than a year, you can benefit from the reduced tax rate on the gains. Consider selling loss positions to offset incurred or planned capital gains before year end.
The 2020 estate and gift tax exemption is $11,580,000 per person ($23,160,000 for a married couple). These figures are scheduled to go back to $5 million and $10 million, respectively, after 2025; however, these limits can be reduced by legislation. Preliminary consideration to more robust gifting strategies for 2020 may be appropriate. IRS regulations issued in 2018 indicate that gifts under the gift tax exemption amount at the date of the gift(s) will not be “clawed back” upon a taxpayer’s death even if the taxpayer made gifts in excess of the estate tax exemption ultimately in effect at the taxpayer’s death.
Business taxpayers should consider utilization of the 100% bonus depreciation for qualified fixed asset additions, available for assets place in service prior to January 1, 2023. Taxpayers may elect out of the additional first-year bonus depreciation. The relevant consideration is a time value of money analysis of the tax benefits that is affected by expected current and future marginal tax rates, including possible legislative changes in tax rates. Preliminary planning pending election results and possible implications might be wise.
We’re Here to Help You
BMSS understands that the complexity of the tax law can make year-end tax planning overwhelming, particularly in this election year. This letter covers several of the high points for 2020, but there are many more strategies that can help reduce your tax liability over a period of time. As we learn more about the election results and possible implications, we will provide additional analysis of appropriate tax planning considerations.
Please contact BMSS at (833) CPA-BMSS if you have any questions regarding the opportunities presented in this letter or to schedule an appointment to develop a year-end tax plan for your unique circumstances. BMSS strives to provide each client with peace of mind and we are available upon request to help you evaluate 2020 year-end planning and to plan for the upcoming tax season.