The following planning strategies are based upon current tax laws. The team at SFMG is closely monitoring the tax legislation changes that may impact our clients before year-end. We will communicate any planning opportunities that arise.
As legislators in Washington D.C. look to make tax changes before year-end, the 2020 SECURE Act and Tax Cuts and Jobs Act continue to impact every taxpayer. Regardless of pending changes, it’s as important as ever to evaluate various tax planning ideas and actions with your tax preparer. The following are some items to consider before year-end:
2020 SECURE Act — Modified requirements for employer-provided plans, individual retirement accounts (IRAs), and other tax-favored savings accounts.
- The SECURE Act repealed the maximum age of 70 for Traditional IRA contributions and allows taxpayers to continue to make contributions to the extent that the taxpayers receive earned income. Contribution limits apply.
- The age of the required beginning date for mandatory distributions is 72 for those who were born on 07/01/1949 or later.
- If the IRA account holder has passed away, distributions to individuals other than the spouse must be made within ten years of the account holder’s death. Distributions over the life expectancy of a non-spouse beneficiary are allowed if that beneficiary is a minor, disabled, chronically ill, or no more than ten years younger than the deceased at the time of death. Note that for minors, this exception only applies until they reach the age of majority. At that point, the distributions must be made within ten years.
- Penalty-free withdrawals may be made from certain retirement plans if a child is born or adopted.
Tax Cuts and Jobs Act Updates
- Tax rates remain the same for 2021 with a slight increase to the income ranges between brackets, to account for inflation. The top tax bracket remains at 37%.
- The standard deduction increased from $24,800 to $25,100 for Married Filing Jointly filers and from $12,400 to $12,550 for Single filers.
- Itemized deductions for taxes paid remain limited to $10,000 for MFJ filers and $5,000 for single filers. “Taxes paid” include state and local income taxes, sales tax, and property tax. If property taxes are less than $5,000 per year, consider doubling property tax payments every other year by making one payment in January and the other at the end of the year. This may help increase the amount of itemized deductions over the standard deduction, allowing a larger deduction every other year.
- Interest on mortgage debt for homes purchased after 12/15/2017 have a reduced maximum value of $750,000 ($1,000,000 in 2017).
Take Advantage of Tax-Deferred Growth
- Take full advantage of available retirement plans (401k, IRA, SEP-IRA, defined benefit, etc.) and other non-qualified plans (executive bonus, carve-out plans, deferred compensation, etc.) to defer and/or minimize income taxes over the long-term. IRA Contribution limit is $6,000 with an additional $1,000 catch-up contribution if over age 50. Contribution limits for 401ks are $19,500, with an additional $6,500 catch-up contribution if over age 50.
- Note that the window to make contributions to an employer plan typically closes at the end of the year, while taxpayers generally have until the April 15th income tax deadline to make IRA contributions to Traditional and Roth IRAs.
- If eligible, maximize contributions to Health Savings Accounts, which are pre-tax and tax-deferred funds that can be withdrawn tax free for future medical expenses. Taxpayers may be able to defer an additional $3,600—$7,300 (with an additional $1,000 catch-up for those 55+) of income for this purpose.
Revisit Charitable Giving Strategy
- Consider taking an above-the-line deduction for cash contributions to qualified charitable organizations. (up to $300 for single filers and $600 for married filing jointly)
- Use a Donor Advised Fund to make a future donation to charity but receive a current income tax deduction. With the higher standard deduction in 2021, this is a great tool that allows the taxpayer to donate multiple years’ worth of gifts in one year (bunching gifts), while being able to control the future distribution of funds. This strategy can increase itemized deductions over the standard deduction, allowing taxpayers to itemize for the tax year ($25,100 for married filing jointly and $12,550 for single filers).
- Consider gifting appreciated securities to avoid potential capital gains tax. Be aware that if donating securities, it could take custodians up to two weeks to process, and therefore, should be initiated by 12/15/2021 to ensure it will qualify for a 2021 deduction.
- For taxpayers over age 70.5, consider donating the Required Minimum Distribution (RMD) directly to a charity (up to $100,000 per IRA owner). This Qualified Charitable Deduction (QCD) will allow those who will no longer qualify for itemized deductions to reduce their taxable income through charitable contributions.
Estate and Gift Taxes
- The maximum estate tax rate is 40% and the estate tax exemption is $11.7 million in 2021.
- Be aware that the annual federal gift tax exclusion allows the taxpayer to give away up to $15,000 in 2021 to as many people as the taxpayer wishes without those gifts counting against the lifetime estate tax exemption.
- Direct tuition and medical expense payments made on behalf of another person do not count against the $15,000 gift tax exclusion.
- Consider wealth transfer strategies to reduce the taxable estate and ensure that assets will be utilized according to the taxpayer’s wishes, both now and in the future. We recommend discussing estate planning with us and an estate attorney prior to year-end if interested in these strategies.
Other Considerations
- Upcoming legislation could have significant changes on current tax law. Areas that could be impacted are: tax rates, income ranges between tax brackets, mortgage deductions, and estate exemptions. SFMG will be monitoring these changes and update our clients as needed with any planning opportunities.
- Check beneficiary designations on retirement accounts and life insurance policies, especially if there has been a major life change (marriage, divorce, death of spouse, new child, etc.).
- Review the titling of assets to ensure they remain in alignment with the estate planning design and goals, as well as to reduce or avoid the cost of probate.