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2021 Year-End Tax Planning For Individuals

Posted on November 2021November 2021 by info

As we approach year end, now is the time for individuals to review their 2021 and 2022 tax situations and identify opportunities for reducing, deferring, or accelerating tax obligations. Areas potentially impacted by proposed tax legislation still in play should be reviewed, as well as applicable opportunities and relief granted under legislation enacted during the past year.

The information contained within this article is based on tax proposals as presented in the November 3, 2021, version of the Build Back Better Act. Our guidance is subject to change when final legislation is passed. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.

For more information and to track the status of tax measures under consideration by Congress, see BDO’s Tax Policy Watch.

Individual Tax Planning Highlights

2021 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estate & Trusts
10%	$0 – $19,900	$0 – $9,950	$0 – $14,200	$0 – $9,950	$0 – $2,650
12%	$19,901 – $81,050	$9,951 – $40,525	$14,201 – $54,200	$9,951 – $40,525	–
22%	$81,051 – $172,750	$40,526 – $86,375	$54,201 – $86,350	$40,526 – $86,375	–
24%	$172,751 $329,850	$86,376 – $164,925	$86,351 – $164,900	$86,376 – $164,925	$2,651 – $9,550
32%	$329,851 – $418,850	$164,926 – $209,425	$164,901 – $209,400	$164,926 – $209,425	–
35%	$418,851 – $628,300	$209,426 – $523,600	$209,401 – $523,600	$209,426 – $314,150	$9,551 – $13,050
37%	Over $628,300	Over $523,600	Over $523,600	Over $314,150	Over $13,050

2022 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $20,550	$0 – $10,275	$0 – $14,650	$0 – $10,275	$0 – $2,750
12%	$20,551 – $83,550	$10,276 – $41,775	$14,651 – $55,900	$10,276 – $41,775	–
22%	$83,551 – $178,150	$41,776 – $89,075	$55,901 – $89,050	$41,776 – $89,075	–
24%	$178,151 – $340,100	$89,076 – $170,050	$89,051 – $170,050	$89,076 – $170,050	$2,751 – $9,850
32%	$340,101 – $431,900	$170,051 – $215,950	$170,051 – $215,950	$170,051 – $215,950	–
35%	$431,901 – $647,850	$215,951 – $539,900	$215,951 – $539,900	$215,951 – $323,925	$9,851 – $13,450
37%	Over $647,850	Over $539,900	Over $539,900	Over $323,925	Over $13,450

Proposed Surcharge on High-Income Individuals, Estates and Trusts

The draft Build Back Better Act released on November 3, 2021 would impose a 5% surcharge on modified adjusted gross income that exceeds $5 million for married individuals filing separately, $200,000 for estates and trusts and $10 million for all other individuals. An additional 3% surcharge would be imposed on modified adjusted gross income in excess of $12.5 million for married individuals filing separately, $500,000 for estates and trusts and $25 million for all other individuals. The proposal would be effective for taxable years beginning after December 31, 2021 (i.e., beginning in 2022).

While keeping the proposed surcharges in mind, taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2021 and 2022. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate. If the marginal tax rate is the same in both years, deferring income from 2021 to 2022 will produce a one-year tax deferral and accelerating deductions from 2022 to 2021 will lower the 2021 income tax liability.

Actions to consider that may result in a reduction or deferral of taxes include:

Delaying closing capital gain transactions until after year end or structuring 2021 transactions as installment sales so that gain is deferred past 2021 (also see Long Term Capital Gains, below).
Considering whether to trigger capital losses before the end of 2021 to offset 2021 capital gains.
Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
Deferring commission income by closing sales in early 2022 instead of late 2021.
Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2021 (subject to AGI limitations).
Evaluating whether non-business bad debts are worthless by the end of 2021 and should be recognized as a short-term capital loss.
Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.

On the other hand, taxpayers that will be in a higher tax bracket in 2022 or that would be subject to the proposed 2022 surcharges may want to consider potential ways to move taxable income from 2022 into 2021, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2022 taxes include:

Accelerating capital gains into 2021 or deferring capital losses until 2022.
Electing out of the installment sale method for 2021 installment sales.
Deferring deductions such as large charitable contributions to 2022.

Long-Term Capital Gains

The long-term capital gains rates for 2021 and 2022 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.

2021 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $80,800	$0 – $40,400	$0 – $54,100	$0 – $40,400	$0 – $2,700
15%	$80,801 – $501,600	$40,401 – $445,850	$54,101 – $473,750	$40,401 – $250,800	$2,701 – $13,250
20%	Over $501,600	Over $445,850	Over $473,750	Over $250,800	Over $13,250

2022 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
0%	$0 – $83,350	$0 – $41,675	$0 – $55,800	$0 – $41,675	$0 – $2,800
15%	$83,351 – $517,200	$41,676 – $459,750	$55,801 – $488,500	$41,676 – $258,600	$2,801 – $13,700
20%	Over $517,200	Over $459,750	Over $448,500	Over $258,600	Over $13,700

Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:

Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
Investing in, and holding, “qualified small business stock” for at least five years. (Note that the November 3 draft of the Build Back Better Act would limit the 100% and 75% exclusion available for the sale of qualified small business stock for dispositions after September 13, 2021.)
Donating appreciated property to a qualified charity to avoid long term capital gains tax (also see Charitable Contributions, below).

Net Investment Income Tax

An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. For 2021, net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.

The November 3 version of the Build Back Better Act would broaden the application of the NIIT. Under the proposed legislation, the NIIT would apply to all income earned by high income taxpayers unless such income is otherwise subject to self-employment or payroll tax. For example, high income pass-through entity owners would be subject to the NIIT on their distributive share income and gain that is not subject to self-employment tax. In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider the following tax planning to minimize their NIIT liabilities:

Deferring net investment income for the year.
Accelerating into 2021 income from pass-through entities that would be subject to the expanded definition of net investment income under the proposed tax legislation.

Social Security Tax

The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $142,800 for 2021 and $147,000 for 2022. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.

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 deduction amount is determined by an individual’s age. The following table sets forth the deductible limits for 2021 and 2022 (the limitations are per person, not per return):

Age	Deduction Limitation 2021	Deduction Limitation 2022
40 or under	$450	$450
Over 40 but not over 50	$850	$850
Over 50 but not over 60	$1,690	$1,690
Over 60 but not over 70	$4,520	$4,510
Over 70	$5,640	$5,640

Retirement Plan Contributions

Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs) while keeping in mind the current proposed tax legislation that would limit contributions and conversions and require minimum distributions beginning in 2029 for large retirement funds without regard to the taxpayer’s age.

The maximum amount of elective contributions that an employee can make in 2021 to a 401(k) or 403(b) plan is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions). For 2022, these limits are $20,500 and $27,000, respectively.
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for such individuals is due by April 1 of the year after the year in which they turn 72.
Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan 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 2021 is $58,000. The maximum SEP contribution for 2022 is $61,000. 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).
2021 could be the final opportunity to convert non-Roth after-tax savings in qualified plans and IRAs to Roth accounts if legislation passes in its current form. Proposed legislation would prohibit all taxpayers from funding Roth IRAs or designated Roth accounts with after-tax contributions starting in 2022, and high-income taxpayers from converting retirement accounts attributable to pre-tax or deductible contributions to Roths starting in 2032.
Proposed legislation would require wealthy savers of all ages to substantially draw down retirement balances that exceed $10 million after December 31, 2028, with potential income tax payments on the distributions. As account balances approach the mandatory distribution level, extra consideration should be given before making an annual contribution.

Foreign Earned Income Exclusion

The foreign earned income exclusion is $108,700 in 2021, to be increased to $112,000 in 2022.

Alternative Minimum Tax

A taxpayer must pay either the regular income tax or the alternative minimum tax (AMT), whichever is higher. The established AMT exemption amounts for 2021 are $73,600 for unmarried individuals and individuals claiming head of household status, $114,600 for married individuals filing jointly and surviving spouses, $57,300 for married individuals filing separately and $25,700 for estates and trusts. For 2022, those amounts are $75,900 for unmarried individuals and individuals claiming the head of household status, $118,100 for married individuals filing jointly and surviving spouses, $59,050 for married individuals filing separately and $26,500 for estates and trusts.

Kiddie Tax

The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.

Limitation on Deductions of State and Local Taxes (SALT Limitation)

For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act (TCJA) introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017 and before January 1, 2026. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.

The November 3 draft of the Build Back Better Act would extend the TCJA SALT deduction limitation through 2031 and increase the deduction limitation amount to $72,500 ($32,250 for estates, trusts and married individuals filing separately). An amendment currently on the table proposes increasing the deduction limitation amount to $80,000 ($40,000 for estates, trusts and married individuals filing separately). The proposal would be effective for taxable years beginning after December 31, 2020, therefore applying to the 2021 calendar year.

Charitable Contributions

The Taxpayer Certainty and Disaster Relief Act of 2020 extended the temporary suspension of the AGI limitation on certain qualifying cash contributions to publicly supported charities under the CARES Act. As a result, individual taxpayers are permitted to take a charitable contribution deduction for qualifying cash contributions made in 2021 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. The limitations for cash contributions continue to be 30% of AGI for non-operating private foundations and 60% of AGI for donor advised funds. The temporary suspension of the AGI limitation on qualifying cash contributions will no longer apply to contributions made in 2022. Contributions made in 2022 will be subject to a 60% AGI limitation. Tax planning around charitable contributions may include:

Maximizing 2021 cash charitable contributions to qualified charities to take advantage of the 100% AGI limitation.
Deferring large charitable contributions to 2022 if the taxpayer would be subject to the proposed individual surcharge tax.
Creating and funding a private foundation, donor advised fund or charitable remainder trust.
Donating appreciated property to a qualified charity to avoid long term capital gains tax.

Estate and Gift Taxes

The November 3 draft of the Build Back Better Act does not include any changes to the estate and gift tax rules. For gifts made in 2021, the gift tax annual exclusion is $15,000 and for 2022 is $16,000. For 2021, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $11,700,000 per person. For 2022, the exemption is $12,060,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2021 and 2022, only the first $159,000 and $164,000, respectively, of gifts to a non-U.S. citizen spouse are excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:

Making annual exclusion gifts.
Making larger gifts to the next generation, either outright or in trust.
Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).

Net Operating Losses

The CARES Act permitted 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 unused portion of such losses was eligible to be carried forward indefinitely and without limitation. Net operating losses generated beginning in 2021 are subject to the TCJA rules that limit carryforwards to 80% of taxable income and do not permit losses to be carried back.

Excess Business Loss Limitation

A non-corporate taxpayer may deduct net business losses of up to $262,000 ($524,000 for joint filers) in 2021. The limitation is $270,000 ($540,000 for joint filers) for 2022. The November 3 draft of the Build Back Better Act would make permanent the excess business loss provisions originally set to expire December 31, 2025. The proposed legislation would limit excess business losses to $500,000 for joint fliers ($250,000 for all other taxpayers) and treat any excess as a deduction attributable to a taxpayer’s trades or businesses when computing excess business loss in the subsequent year.

Year-End Tax Planning for Individuals

Posted on November 2020December 2020 by info

As the year-end approaches, individuals and business owners should be reviewing their situations to identify any opportunities for reducing, deferring or accelerating tax obligations. Areas that should be looked at in particular include tax reform provisions, as well as new opportunities and relief granted earlier in 2020 under the CARES and SECURE Acts. This article highlights specific areas and provides preliminary inflationary adjustment items for 2021 as of October 15, 2020, compared to current 2020 amounts, to aid taxpayers as they plan deferrals and accelerations before year-end (anticipated inflationary adjustments; official numbers have not yet been published by the IRS, but are expected to be made available later in 2020).

A discussion about 2020 year-end tax planning likely should involve a discussion about the U.S. presidential election. To date, neither candidate has released a formal plan regarding the tax code. Taxpayers can still make informed decisions by taking into consideration what the candidates have said about tax policy on the campaign trail. Of note, Joe Biden has spoken to:

Raising the top individual income tax rate to 39.6%
Raising the tax on capital gains at 39.6% for taxpayers with more than $1,000,000 in income
Eliminating step-up of basis at death

The information contained within this article is summarized. Taxpayers should consult with a trusted advisor when making tax and financial decisions regarding any of the items below.

Individual’s Tax Planning Highlights

2020 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estate & Trusts
10%	$0 – $19,750	$0 – $9,875	$0 – $14,100	$0 – $9,875	$0 – $2,600
12%	$19,751 – $80,250	$9,876 – $40,125	$14,101 – $53,700	$9,876 – $40,125	–
22%	$80,251 – $171,050	$40,126 – $85,525	$53,701 – $85,500	$40,126 – $85,525	–
24%	$171,051 – $326,600	$85,526 – $163,300	$85,501 – $163,300	$85,526 – $163,300	$2,601 – $9,450
32%	$326,601 – $414,700	$163,301 – $207,350	$163,301 – $207,350	$163,301 – $207,350	–
35%	$414,701 – $622,050	$207,351 – $518,400	$207,351 – $518,400	$207,351 – $311,025	$9,451 – $12,950
37%	Over $622,050	Over $518,400	Over $518,400	Over $311,025	Over $12,950

Projected 2021 Federal Income Tax Rate Brackets

Tax Rate	Joint/Surviving Spouse	Single	Head of Household	Married Filing Separately	Estates & Trusts
10%	$0 – $19,900	$0 – $9,950	$0 – $14,200	$0 – $9,950	$0 – $2,650
12%	$19,901 – $81,050	$9,951 – $40,525	$14,201 – $54,200	$9,951 – $40,525	–
22%	$81,051 – $172,750	$40,526 – $86,375	$54,201 – $86,350	$40,526 – $86,375	–
24%	$172,751 – $329,850	$86,376 – $164,925	$86,351 – $164,900	$86,376 – $164,925	$2,651 – $9,550
32%	$329,851 – $418,850	$164,926 – $209,425	$164,901 – $209,400	$164,926 – $209,425	–
35%	$418,851 – $628,300	$209,426 – $523,600	$209,401 – $523,600	$209,426 – $314,150	$9,551 – $13,050
37%	Over $628,300	Over $523,600	Over $523,600	Over $314,150	Over $13,050

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

The Old-Age, Survivors, and Disability Insurance (OASDI) portion of the social security tax is imposed on employee compensation and self-employment income, but only to the extent of the maximum wage base set by the Social Security Administration ($137,700 for 2020 and $142,800 for 2021 by the Social Security Administration).
The OASDI program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.
On August 8, 2020, President Trump issued an executive order allowing employers to defer the withholding, deposit and payment of certain employee payroll taxes from September 1 to December 31, 2020. Further guidance is contained under Notice 2020-65.
Employers, employees and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%.
Some high earners must pay an extra 0.9% HI payroll tax on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately in 2020. However, employers do not pay that extra tax. This tax, also known as the Additional Medicare Tax, was enacted as part of the Affordable Care Act (ACA). The constitutionality of the ACA has been challenged in California v. Texas, No. 19-840, which is set for oral arguments before the Supreme Court on November 10, 2020. Specifically, the issue before the Court is whether the ACA became unconstitutional when Congress reduced the individual mandate penalty to $0. The effective date of the penalty repeal was January 1, 2019. Accordingly, the Court’s ruling in California v. Texas could ultimately impact the Additional Medicare Tax.

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

If an employer (including a tax-exempt organization) has a 401(k) plan or 403(b) plan, the maximum amount of elective contributions that employee can make in 2020 is $19,500 ($26,000 if age 50 or over and the plan allows “catch up” contributions, which allows an additional $6,500). For 2021, those limits are projected to remain the same. Qualified plan limits are based on the year-to-year increases in the third-quarter Consumer Price Index for All Urban Consumers (CPI-U), so those amounts cannot be finalized until after the September CPI-U values are published in October. The IRS is expected to announce the official 2021 limits in late October or early November.
The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for expenses related to the birth or adoption of a child after December 31, 2019. To qualify, the distribution must be made during the one-year period beginning on the date the child is born or the adoption is finalized. Eligible adoptees are any individual who has not reached age 18 or is physically or mentally incapable of self-support. Qualified birth or adoption distributions are included in the taxpayer’s income in the year of withdrawal but are not subject to the 10% early withdrawal penalty or to the mandatory 20% tax withholding and may be repaid to the retirement plan at any time. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
Previously, individuals were not able to contribute to their traditional IRAs in or after the year in which they turn 70½. The SECURE Act eliminates this age cap.
The SECURE Act changes the age for required minimum distributions (RMDs) from tax-qualified retirement plans and IRAs from age 70½ to age 72 for individuals born on or after July 1, 1949. Generally, the first RMD for individuals who were born on July 1, 1949, or later is due by April 1 of the year after the year in which they turn 72.
The SECURE Act generally requires that designated beneficiaries of persons who die after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not subject to this rule. Conduit trusts and see-through accumulation trusts are required to use the 10-year payout rule unless the trust is for the sole benefit of a disabled or chronically ill beneficiary. Non-see-through accumulation trusts will continue to use the five-year payout period, which was required before the SECURE Act.
The CARES Act allows eligible individuals to withdraw up to $100,000 from qualified retirement plans during 2020 without incurring the 10% early distribution penalty. Individuals or their spouses, dependents or other household members affected by COVID-19 may qualify for this relief. Such taxable distributions can be included in gross income ratably over three years. Taxpayers may recontribute the withdrawn amounts to a tax-qualified plan or IRA at any time within three years after the distribution. These repayments will be treated as a tax-free rollover and are not subject to that year’s cap on contributions.

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.

What Individuals Need To Know About The CARES Act

Posted on April 2020 by info

On March 6, 2020, the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020 was enacted, becoming the first of three Congressional relief and stimulus acts passed in March and setting off a firestorm of administrative relief by several federal agencies including the IRS and Department of Labor.

This alert briefly summarizes the following relief provisions enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020.

Temporary waiver of required minimum distribution (RMD) rules for certain retirement plans and accounts
Temporary waiver of early distribution penalty from tax-qualified plans and special rules related to plan loans
Changes to charitable contribution deduction limitations
Net operating loss (NOL) carrybacks for losses generated after December 31, 2017
Postponement of excess business loss limitation and relief for limitations incurred in 2018 and 2019
Recovery rebates for individuals

Temporary Waiver of RMD Rules for Certain Retirement Plans and Accounts

Generally, required minimum distributions must begin at age 72 for individuals born on or after July 1, 1949, or at age 70 ½ for individuals born before July 1, 1949.

The CARES Act waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020. This applies even for taxpayers who turned 70 ½ in 2019 but deferred their first RMD to April 1, 2020.

RMDs that have already been taken in 2020 may be rolled over within 60 days of the distribution.

Insights:

Waived RMDs do not need to be taken in subsequent years. However, any forgone RMD in 2020 will affect the account balance used to calculate the RMD in 2021 and future years. It is not known whether additional relief will be offered for individuals who took their RMD early in 2020 and are already outside the 60-day rollover window. RMDs were last waived in 2009. At that time, the IRS issued a notice stating that the 60-day rollover deadline would be satisfied if completed by a given date that year. It is possible that similar guidance will be issued this year.

Special Rules for Use of Retirement Funds

Eligible individuals can withdraw up to $100,000 for coronavirus-related purposes from tax-qualified retirement plans during 2020 without incurring the usual 10% early distribution penalty.

Taxable distributions should generally be included in gross income ratably over a three-year period.

Taxpayers may recontribute the withdrawn amounts in one or more re-contribution payments to the qualified plan at any time within three years of the distribution. These repayments will be treated as a tax-free rollover and not subject to that year’s cap on contributions.

The CARES Act also makes it easier to borrow money from 401(k) plans, raising the borrowing limit from $50,000 to $100,000 for the first 180 days after enactment, and by delaying the payment dates for any loans due the rest of 2020 for one year. (The CARES Act was enacted March 27, 2020; the 180-day window closes September 23, 2020.)

Coronavirus-related distributions are made to an individual (i) diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; (ii) whose spouse or dependent is diagnosed with COVID-19 by such a test; or (iii) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Notably, however, a “dependent” here is defined more broadly than a “qualifying child” for purposes of the recovery rebates. Here, “dependent” includes children under the age of 19 or full-time students under the age of 24 as of December 31, 2020. In addition, individuals who are permanently and totally disabled may also be considered dependents, as can certain other qualifying relatives such as parents and in-laws.

Insights:

Given that COVID-19 tests are in short supply, it’s likely that most individuals will look to the last catch-all category for relief under this provision.

What’s unclear in the CARES Act is the timing of these two three-year periods and whether they run concurrently, or whether the three-year gross income inclusion period is subsequent to the three-year payback period.

California has its own early distribution penalty and while California’s statue generally conforms to the federal Internal Revenue Code, California likely needs to enact its own legislation to offer similar relief.

Allowance of Partial Above-The-Line Deduction for Charitable Contributions

Individuals who do not elect to itemize their deductions in 2020 may take a qualified charitable contribution deduction of up to $300 against their adjusted gross income in 2020. A qualified charitable contribution is a charitable contribution (i) made in cash, (ii) for which a charitable contribution deduction is otherwise allowed, and (iii) which is made to certain publicly supported charities.

Insights:

This above-the-line charitable deduction may not be taken for contributions to a non-operating private foundation or a donor advised fund.

Modification of Limitations on Charitable Contributions During 2020

Currently, individuals who make cash contributions to publicly supported charities are permitted a charitable contribution deduction of up to 60% of their AGI. Any contributions in excess of the 60% AGI limitation may be carried forward as a charitable contribution 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 is still carried forward as a charitable contribution in each of the succeeding five years.

Insights:

This provision benefits taxpayers who elect to itemize their deductions in 2020 and make cash contributions to certain public charities. Contributions to non-operating private foundations or donor advised funds are not eligible for the 100% AGI limitation.

Net Operating Losses

Previously, NOLs generated beginning in 2018 were limited to 80% of taxable income computed without regard to any NOL deduction. Any unused NOL was not able to be carried back but could be carried forward indefinitely.

The CARES Act permits individuals with NOLs generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry back such NOLs five taxable years. Such NOLs not carried back may continue to be carried forward indefinitely. The CARES Act also eliminates the 80% taxable income limitation imposed by the TCJA for taxable years beginning before January 1, 2021.

Insights:

Taxpayers with NOLs generated in 2018 and 2019 may find it advantageous to amend returns prior to those years to carryback NOLs to years with taxable income subject to a 39.6% tax rate.

Excess Business Loss Limitations

Beginning in 2018, net business losses in excess of $500,000 for joint filers ($250,000 for all other taxpayers) were not allowed as a current deduction against other income. These threshold amounts were indexed for inflation and, in 2020, were scheduled to be $518,000 for joint filers ($259,000 for all other taxpayers). The disallowed business losses became a net operating loss applied to subsequent taxable years.

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. Thus, taxpayers will be allowed to offset their business losses against other income for 2020.

Insights:

Taxpayers will need to address with their tax advisors the impact of the retroactive removal of the excess business loss limitation rule for 2018 and 2019. Many taxpayers have not yet filed for 2019 and the removal of the loss limitation rule should be considered in the preparation of the 2019 return. If a taxpayer was subject to the excess business loss rule in his or her 2018 tax return, the taxpayer should amend his or her 2018 return to take advantage of the elimination of the rule for 2018. Taxpayers may have a refund opportunity for 2018 if their net business losses were limited and may also find their 2019 tax liabilities either increased or decreased, depending on whether their business losses were being carried forward to 2019 or were sustained in 2019 but were limited.

Recovery Rebates for Individuals

Eligible individuals will receive a refundable tax credit against their 2020 taxable income equal to $1,200 ($2,400 for joint filers) plus $500 per qualifying child. The refund is determined based on the taxpayer’s 2020 income tax return but is advanced to taxpayers based on their most recent income tax filing – the 2018 or 2019 tax return, as appropriate.

The credit begins to phase out if the individual’s AGI exceeds $75,000 ($150,000 for joint filers and $112,500 for head of household filers), and is reduced by an amount equal to 5% of the amount in which the taxpayer’s AGI exceeds these thresholds. As a result, individuals with no qualifying children completely phase out of the credit if their AGI exceeds $99,000 ($198,000 for joint filers). Individuals with two qualifying children completely phase out of the credit if their AGI exceeds $119,000 ($218,000 for joint filers).

If an eligible individual’s 2020 income is higher than the 2018 or 2019 income used to determine the rebate payment, the eligible individual will not be required to pay back any excess rebate. However, if the eligible individual’s 2020 income is lower than the 2018 or 2019 income used to determine the rebate payment such that the individual should have received a larger rebate, the eligible individual will be able to claim an additional credit generally equal to the difference of what was refunded and any additional eligible amount when they file their 2020 income tax return.

Individuals who have not filed a tax return in 2018 or 2019 may still receive an automatic advance based on their social security benefit statements (Form SSA-1099) or social security equivalent benefit statement (Form RRB-1099). Individuals who are otherwise not required to file and are not receiving social security benefits are still eligible for the rebate but will be required to file a tax return to claim the benefit.

The CARES Act provides that the IRS will make automatic payments to individuals who have previously electronically filed their income tax returns using direct deposit banking information provided on a return any time after January 1, 2018.

Eligible individuals do not include nonresident aliens, individuals who may be claimed as a dependent on another person’s return, estates, and trusts.

A qualifying child (i) is a child, stepchild, eligible foster child, brother, sister, stepbrother, or stepsister, or a descendent of any of them, (ii) under age 17, (iii) who has not provided more than half of their own support, (iv) has lived with the taxpayer for more than half of the year and (v) who has not filed a joint return (other than only for a claim for refund) with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.

Insights:

Individuals between the ages of 17 and 24 are ineligible to be claimed as a qualifying child and may be unable to claim their own independent rebate if they are eligible dependents on their parents’ tax return. Eligible dependents include children under the age of 19 or full-time students under the age of 24 who do not provide more than half of their own support and who live with the taxpayer for more than half the year.