2020 Year-End Tax and Wealth Planning
One of the bright examples of hope on the horizon are two FDA-approved vaccines that have been granted emergency authorization for use and also offer encouraging levels of efficacy. They are currently being distributed across the United States with a priority towards at-risk individuals, front-line healthcare workers and first responders. Both the vaccine developed by Pfizer and BioNTech, and the vaccine by Moderna have over 94% rates of effectiveness overall. We look forward to seeing progress in the fight against COVID-19 in the days and months ahead.
As 2020 comes to an end, here are our thoughts on a few important planning strategies and considerations:
- Up to 100% deductibility against AGI of charitable gifts made with cash: Under the CARES Act, passed in the spring of 2020, philanthropic individuals may take advantage of 100% deductibility on charitable gifts made with cash to qualifying charities (up from 60% of AGI previously). It is worth noting that Donor Advised Funds are excluded from this temporary increase for gifts made prior to December 31, 2020. Appreciated securities and stock donations still qualify for an income tax deduction up to 30% of AGI. With the higher deductibility for charitable giving in 2020, we recommend aggregating multiple years of expected giving, a strategy also called “bunching”, into one tax year to maximize the deduction they will receive.
- Elimination of RMD requirements from retirement plans for 2020: For this calendar year only, the CARES Act offers relief from the annual requirement for individuals to take required minimum distributions (RMDs) from their 401(k)s, 403(b)s, SEP IRAs, traditional and inherited IRAs. With RMDs no longer required, there is also nothing preventing individuals from taking a distribution. In addition, those who were accustomed to taking Qualified Charitable Distributions (QCDs) from their retirement accounts may still take advantage of this strategy in 2020. Up to $100,000 in distributions made directly to charities remain tax-free and also reduce the retirement account value (thereby decreasing the value used for RMD calculations in 2021).
- Tax loss harvesting: For investors who accumulated short and long-term losses from this year’s market volatility, Benchmark recommends harvesting any of these losses against short and long-term capital gains prior to year end. After netting gains and losses, if any loss remains, it may be used to offset ordinary income on a tax return up to $3,000. Above this amount, it may be carried forward indefinitely until used in future years. Securities with long-term capital gains treatment (especially with low-basis) remain an excellent target to be donated to charities or a Donor Advised Fund. Please be sure to consider the 100% of AGI deductibility of cash donations as noted above while gifting stock in 2020.
- The Lifetime Exemption remains a bogey that we keep our eyes on: In 2020, a married couple can transfer up to $23.16 million to their heirs without paying any estate tax (11.58 million per individual). This number is at a high-water mark historically speaking and represents a tremendous opportunity to make lifetime gifts to “lock-in” exemption by utilizing vehicles like Spousal Lifetime Access Trusts (SLATs) and Irrevocable Trusts for the benefit of future generations. As we keep tabs on the Georgia run-off election, we are cognizant that a result that puts the Senate in Democratic control could have an impact on the lifetime exemption amount as well as other key tax legislation. In 2026, the 11.58 million exemption amount is scheduled to sunset back to pre-Tax and Job Cuts Act (TJCA) legislation of $5.49MM, but under the above scenario, we could see major changes to estate and gift tax rules in early 2021. Some have hypothesized the reversion could be to pre-TJCA levels or below. Based on these considerations, we recommend being proactive with your wealth and estate planning as the situation evolves.
- Annual Exclusion Gifting: Each person may gift up to $15,000 in present-interest gifts (married couples up to $30,000) to another individual annually. We recommend high-net-worth individuals maximize their ability to make these gifts to transfer assets and reduce their taxable estate. Annual exclusion gifts can include gifts to 529 plans for children or grand-children in addition to gifts to Irrevocable Life Insurance Trusts (ILITs). It is important to note that direct payments to educational organizations and payments for a person’s medical care directly to a provider do not utilize the annual exclusion.
Matt D. Eltringham, CFP®
Managing Director, Wealth Advisor
The above material is for informational purposes only and not to be construed as tax, legal, or financial advice.