It’s time to plan for our 2020 taxes – remember, many deductions and tax credits must be in place by December 31, 2020, to take advantage of them for this tax year.
The provisions of the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in December of 2017, are mostly still in force. There are additional changes for 2020, as provisions included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law on December 20, 2019, and in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020.
The SECURE Act pushed back the date in which required minimum distributions (RMDs) must be taken from the qualified account by the participant. Previously, RMDs had to begin the year the participant turned 70½; under the SECURE Act, participants have until age 72 to begin RMDs. If you are working and healthy, you can allow your retirement savings to grow an additional year and a half, which can produce significant additions to your funds.
In addition, if you are over 70 and still working, you can now continue contributing to a traditional IRA – previously, no contributions were permissible for those 70½ and older. However, should you choose to continue these contributions, your qualified charitable distributions (QCDs) may be affected; if you are 70½ or older, a portion of QCDs may be included in your taxable income, where previously QCDs were 100% excludable.
Those expecting an addition to the family, either through birth or adoption, can take distributions of up to $5,000 per parent from a traditional IRA without incurring the 10% penalty for early withdrawals for participants under age 59½.
The CARES Act waives the above 10% penalty for early distributions from qualified accounts of up to $100,000 if the funds are needed due to coronavirus-related causes. In addition, these distributions can be included as income in equal installments over three years, and, if the distributed funds are replaced in the qualified account within three years, the tax consequences can be reversed.
For 2020, dollar limits on contributions to retirement plans and Simple IRAs are raised – for 2020, the maximum contribution to a 401(k), 403(b), or 457 plan is $19,500; if you were born before 1971, you can contribute an additional $6,500 this year – each of these amounts has risen by $500 over 2019 limits. The 2020 cap for Simple IRA contributions is $13,500, plus an additional $3,000 for those age 50 and over. The cap for traditional IRA contributions remains at $6,000, with an additional $1,000 for the over-50 contributor.
Further, pursuant to the CARES Act and IRS Notice 2020-51, RMDs are suspended for 2020 – meaning, you don’t have to take them – and incur the tax liability – this year. This applies to everyone with defined contribution plans (defined benefit plans are excepted from this suspension) – those with company plans, such as 401(k)s and 403(b)s, those with IRAs, and those who are taking distributions as beneficiaries of an inherited account.
If you don’t need the income, you may prefer not to take these distributions, and to save on your taxes, while you can. The Dow is fluctuating, we remain in uncertain economic times, and this is a general election year – all factors to be considered in making your decision whether to take your RMD(s) or not.
While tax rates on long-term capital gains have not changed for 2020, income thresholds triggering the next higher bracket have increased – single filers are taxed at 0% if their taxable income is $40,000 or less ($53,600 for heads-of-household, $80,000 for joint returns).
The 20% tax rate kicks in at $441,451 for those filing as single, $469,051 for heads-of-household, and $496,601 for those filing joint returns.
Taxpayers falling between the 0% and 20% income levels incur a 15% tax liability on long-term capital gains.
The 3.8% net investment income surcharge remains at 2019 levels, applicable to those filing singly whose modified adjusted gross income (AGI) is over $200,000, and joint filers with modified AGI over $250,000.
Under the CARES Act, more charitable donations can be deducted this year than in 2019. The former limit on cash donations to charity by those who itemize their deductions (donor-advised funds and private non-operating foundations excluded) of 60% of AGI has been suspended for 2020.
In addition, those who do not itemize can write off up to $300 in charitable cash contributions via a new-for-2020 “above-the-line” deduction.
The various Acts pertaining to fiscal relief for individuals, employees, and businesses has created a maze of tax credits, opportunities, and potential liabilities for businesses.
Please consult with us to ensure you are taking every credit and opportunity available in your individual situation, and mitigating any liabilities.
If you would like to discuss how the changes for 2020 potentially affects your own income tax liabilities, please click here to email me directly.
Until next Wednesday –