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2020 Year-End Tax Planning for Individuals

Posted by BOOSCPA Strategic Tax Services Group Posted on Dec 11 2020
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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.