Mazars: Year End Tax Planning for Individuals
December 10, 2020
To say that 2020 has been a year of surprises and the unexpected is to put it lightly. Although we can’t control everything, there are several steps we can take now to create a foundation for the future and to make it less uncertain.
As we head into the holiday season, here are a few things you can do before the end of the year with respect to tax planning. As with most things, it’s better to be proactive with your financial situation and plan not just for the end of the year, but well into the future.
- The Tax Cut and Jobs Act (“TCJA”) was signed into law at the end of 2017 and initially applied to the 2018 tax year. The TCJA modified the income tax brackets and rates including a reduction in the top rate from 39.6% to 37%. It imposed a limitation on certain itemized deductions including a $10,000 cap on state and local taxes, eliminated personal exemptions and provided for an increased standard deduction. Several of the changes made by the TCJA have been modified by subsequent legislative changes.
- The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) was signed on December 20, 2019. Among other changes, the SECURE Act changed the beginning age at which distributions are required to be taken from retirement plans from 70 ½ to 72 and it allowed penalty free withdrawals for birth or adoption expenses up to $5,000 per child. It did, however, eliminate a common planning technique called the “stretch” IRA. Many changes under the SECURE Act became effective in 2020.
- The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed on March 27, 2020 as one of the federal government’s responses to the COVID-19 crisis. Several features of the CARES Act are discussed further herein. We would like to note that several states have not adopted all the provisions of the CARES Act.
- President-elect Biden has proposed several changes to the taxation of individuals. Some of the proposals are as follows:
- Raising the tax rate on individuals from the current 37% to 39.6%.
- Increasing the top tax rate on capital gains and qualified dividends from the current 20% to 39.6% for taxpayers with income in excess of $1,000,000.
- Assessing the social security tax on the amount of wages and self-employment income earned in excess of $400,000.
- Itemized deductions:
- Reinstating the 3% Pease reduction on overall itemized deductions for every dollar by which income exceeds $400,000
- Capping the benefit of itemized deductions at 28% of income for taxpayers with income over $400,000
Although the Democrats retained a majority in the House of Representatives, the controlling party in the Senate will not be known until January 5, 2021 after the two run off elections in Georgia. Even if the Democrats win control of the Senate (through a tie breaking vote by the Vice President), it remains to be seen what legislation would actually pass.
The current 2020 and 2021 income and capital gains tax brackets and rates and standard deduction amounts are as follows. Knowledge of these amounts are important when attempting to bunch expenses and defer income.