2020 Year-End Tax Planning
for Individuals
As the year-end approaches, individuals,
business owners and family offices should be reviewing their
situations to identify any opportunities for reducing, deferring, or
accelerating tax obligations. Areas that should be looked at include
tax reform provisions that remain in play, as well as new
opportunities and relief granted earlier in 2020 under the CARES and
SECURE Acts.
Individual’s Tax Planning Highlights
Long-Term Capital
Gains
The
brackets for long-term capital gains for 2020 and the projected 2021
rates are shown below. Long-term capital gains are subject to a lower
tax rate, so investors may wish to consider holding on to assets for
over a year to qualify for those rates.
|
Long-Term
Capital Gains Tax Rate
|
Single |
Joint |
Head
of Household
|
|
2020
|
Projected
2021
|
2020
|
Projected
2021
|
2020
|
Projected
2021
|
|
0%
|
$0
- $40,000
|
$0
- $40,400
|
$0
- $80,000
|
$0
- $80,800
|
$0
- $53,600
|
$0
- $54,100
|
|
15%
minimum income
|
$40,001 -
$441,450 |
$40,401
- $445,850
|
$80,001 -
$496,600 |
$80,801
- $501,600
|
$53,601
- $469,050
|
$54,101
- $473,750
|
|
20%
minimum income
|
Over
$441,450
|
Over
$445,850
|
Over
$496,600
|
Over
$501,600
|
Over
$469,050
|
Over
$473,750
|
Social Security
Tax (click
for more information)
Long-Term Care
Insurance and Services
Premiums
an individual pays on a qualified long-term care insurance policy are
deductible as a medical expense. The maximum amount of a deduction is
determined by an individual’s age. The following table sets forth the
deductible limits for 2020 and 2021:
|
Age
|
Deduction
Limitation 2020
|
Projected
Deduction Limitation 2021 |
|
40
or under
|
$430 |
$450
|
|
Over
40 but not over 50
|
$810
|
$850
|
|
Over
50 but not over 60
|
$1,630
|
$1,690 |
Over 60 but
not over 70 |
$4,350 |
$4,520 |
Over 70 |
$5,430 |
$5,650 |
These limitations are per person, not per return. Thus, a married
couple, both spouses over 70 years old, has a combined maximum deduction
of $10,860 ($11,300 projected for 2021), subject to the applicable AGI
limit.
Retirement Plan Contributions (Click for more information)
Foreign Earned
Income Exclusion
The
foreign
earned income exclusion
is $107,600 in 2020, projected to increase to $108,700 in 2021.
Alternative
Minimum Tax
A
taxpayer must pay either the regular income tax or the alternative
minimum tax, whichever is higher. The established exemption amounts
for 2020 are $72,900 for unmarried individuals and individuals
claiming head of household status, $113,400 for married individuals
filing jointly and surviving spouses, and $56,700 for married
individuals filing separately. For 2021, those amounts are projected
to increase to $73,600 for unmarried individuals and individuals
claiming the head of household status, $114,600 for married
individuals filing jointly and surviving spouses, and $57,300 for
married individuals filing separately.
Kiddie
Tax
The
SECURE Act reinstates
the kiddie tax previously
suspended by the Tax Cuts and Jobs Act (TCJA). For tax years beginning
after December 31, 2019, the unearned income of a child is no longer
taxed at the same rates as estates and trusts. Instead, the unearned
income of a child will be taxed at the parents’ tax rates if those
rates are higher than the child’s tax rate. Taxpayers can elect to
apply this provision retroactively to tax years that begin in 2018 or
2019 by filing an amended return.
Charitable
Contributions
Currently,
individuals who make cash contributions to publicly supported
charities are permitted a charitable contribution deduction of up to
60% of their AGI. Contributions in excess of
the 60% AGI limitation may be carried forward in each of the
succeeding five years. The CARES Act suspends the AGI limitation for
qualifying cash contributions and instead permits individual taxpayers
to take a charitable contribution deduction for qualifying cash
contributions made in 2020 to the extent such contributions do not
exceed the taxpayer’s AGI. Any excess carries forward as a charitable
contribution that is usable in the succeeding five years.
Contributions to non-operating private foundations or donor-advised
funds are not eligible for the 100% AGI limitation.
Estate
and Gift Taxes
The
unified estate and gift tax exclusion and generation-skipping transfer
tax exemption is $11,580,000 per person in 2020. For 2021, the
exemption is projected to increase to $11,700,000.
All
outright gifts to a spouse who is a U.S. citizen are free of federal
gift tax. However, for 2020 and 2021, only the first $157,000 and
$159,000 (projected), respectively, of gifts to a non-U.S. citizen
spouse are excluded from the total amount of taxable gifts for the
year.
Simplified Employment Pension Plans
Small
businesses can contribute up to 25% of employees’ salaries (up to an
annual maximum set by the IRS each year) to a Simplified Employee
Pension (SEP) plan. The SEP contribution must be made by the extended
due date of the employer’s federal income tax return for the year
that the contribution is made. The maximum SEP contribution for 2020
was $57,000. The maximum SEP contribution for 2021 is projected to be
$58,000.
The
calculation of the 25% limit for self-employed individuals is based on
net self-employment income, which is calculated after the reduction in
income from the SEP contribution (as well as for other things, such as
self-employment taxes).
Net Operating Losses
Under
the TCJA, net operating losses generated beginning in 2018 were
limited to 80% of taxable income and could not be carried back but
could be carried forward indefinitely. The CARES Act permits
individuals with net operating losses generated in taxable years
beginning after December 31, 2017, and before January 1, 2021, to carry those losses back
five taxable years.
The CARES Act also eliminates the 80% limitation on such losses.
Excess
Business Loss Limitation
Under
Section 461(l), a taxpayer will only be able to deduct net business
losses of up to $262,000 (projected) in 2021 (joint filers can deduct
$524,000 (projected) in 2021) for taxable years beginning after
December 31, 2020, and before January 1, 2026. Excess business losses
are normally disallowed and added to the taxpayer’s net operating loss
carryforward, but the CARES Act suspends the application of this
excess business loss rule for 2020, and retroactively suspends the
excess business loss limitation rule for 2018 and 2019.
