Dear Clients and Colleagues,

Last year’s Tax Cuts and Jobs Act (TCJA) of 2019 was the most sweeping tax reform in over 30 years and brought about many changes, and barring legislative changes, will be with us through the year 2025. Now, the Consolidated Appropriations Act of 2020 (CAATT) was enacted on December 20, 2019 and revived many expired/expiring tax breaks, not only for 2020, but retroactively to tax years 2019 and 2018. The Secure Act portion of CAATT introduces retirement savings changes. Major tax reform and legislative uncertainty complicates tax planning strategies for 2020. Tax law is vast and too complex to cover in one letter. This letter provides you a broad overview of areas that may present tax planning opportunities and potential pitfalls.

Tax Rates and Brackets – Tax brackets remain as 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Income ranges, which apply to each bracket, have been adjusted for inflation and are too numerous to detail.

Capital Gain Rates and Net Investment Income Tax (NIIT) – Capital gain rates and NIIT remain unchanged. The maximum capital gain rates are 0%, 15%, and 20%. NIIT is 3.8%. Consider holding capital assets at least 12 months to avoid short term ordinary tax treatment. Consider selling unrealized loss positions in your investment portfolio to offset recognized long-term gains.

Standard Deduction – The standard deduction amounts for 2020, are $24,800 (MFJ), $18,650 (HOH) and $12,400 (Single/MFS). The additional standard deduction amounts for elderly/blind 2020, are $1,300 (MFJ/MFS, same as 2019) and $1,650 (Single/HOH, same as 2019).

Child Tax Credit & Credit for Other Dependents. The child tax credit remains at $2,000 ($1,400 refundable) for each qualifying child under the age of 17, and $500 for certain other dependents, such as children age 17 or older, students age 19 to 23, children under the age of 17 who have an ITIN or ATIN, or qualifying relatives of any age who can be claimed as your dependent. The income level at which the credits begin to phase out remains at $200,000 ($400,000 MFJ) for 2020.

ABLE Account – The contribution limitation to ABLE accounts remains at $15,000. Certain employed ABLE account beneficiaries can make an additional contribution of the smaller of 1) your compensation or 2) the poverty line amount. In addition, the beneficiary can claim the saver’s credit. Distributions from qualified tuition plans (QTPs, 529) can be rolled over to the ABLE account without penalty by the designated beneficiary of the 529 account, or a member of such beneficiary’s family.

Roth Conversion Recharacterization – A trustee to trustee transfer of Roth IRA conversion back to a traditional IRA is no longer allowed.

Retirement Savings – Many changes will impact retirement savings including IRAs and self-employed retirement plans.

Dollar limit changes – 

          Max contribution:

                        Under age 50 – $6,000

                        Catchup – $1,000

                        Over age 50 – $7,000

            Covered by a retirement plan:

                        MFJ and QW – $104,000 and $124,000

                        Single and HOH – $65,000 and $75,000

                        MFS – less than $10,000

            Not covered by a retirement plan:

                        MFJ and QW – $196,000 and $206,000

                        Single, HOH, MFS (did not live with spouse) – $124,000 and $139,000

                        MFS (lived with spouse) – 0 and $10,000

Required minimum distribution (RMD) age change. After 12/31/19, the RMD is age 72. Prior to 12/31/19, the age was 70.5.

RMD for 2020 have been suspended. These are usually required in the year the account owner turns 72 ( 70.5 before 1/1/20).

Qualified Charitable Distributions (QCD) are available to taxpayers subject to RMD requirements. Taxpayers may make a direct contribution from their IRA to a qualified charity to count towards their RMD requirement up to $100,000. 

Contributions past age 70.5 – Starting after 12/31/19, the age limitation of 70.5 has been repealed; meaning, one can continue to contribute to a traditional IRA past age 70.5.

Individuals may withdraw up to $100,000 from a qualified plan or an IRA retirement account for coronavirus-related purposes without being subject to the 10% early withdrawal penalty. This assumes qualified plans have opted into this provision. Income from these distributions is subject to tax over a three-year period, and individuals may recontribute amounts withdrawn within the three years without limitation.

Distributions for baby/adoption w/o penalty – Starting after 12/31/19, there is no longer a penalty for withdrawing money from an IRA for the birth of a baby or an adoption (limit $5,000).

IRA compensation changes – For tax years starting after 12/31/19, non-tuition fellowships and grants, and difficulty of care payments are included in the compensation calculation for IRA purposes.

Starting after 12/31/19, inherited IRA distributions can no longer stretch out the tax-deferral over the beneficiary’s life; the distributions are generally required to be distributed within ten years of the death of the plan participant.

Elective deferral contributions to 401(k) retirement plans are limited to $19,500 for 2020. Individuals age 50 or older can elect to make catch-up contributions of up to $6,500 (for a total maximum contribution of $26,000).

Kiddie tax – Under TCJA certain children’s net unearned taxable income was taxed using trusts and estates rates. Such children were also subject to a reduced alternative minimum tax (AMT) exemption. The TCJA changes unfairly increased the “kiddie tax” for children that were survivors of deceased military personnel, first responders, and emergency medical workers. The Secure Act portion of CAATTs, repealed the TCJA kiddie tax provisions. Beginning in tax year 2020, the child’s unearned income will be taxed at pre-TCJA rules of applying the parent’s marginal tax rate. Taxpayers have the option of applying either method (trust/estate rates or parent’s rate) for tax years 2019 and 2018. Additionally, the reduced AMT exemption amount has been eliminated (retroactively in 2018) through 2026.

Alimony – For post-2018 divorce decrees and separation agreements, alimony is not deductible by the paying spouse and not taxable to the receiving spouse. Pre-2019 decrees and agreements continue to follow pre-TCJA law by including alimony received in taxable income and allowing a deduction for alimony paid. The law does allow pre-2019 agreements to be legally modified to expressly apply the act rules.

Charitable Contributions – The CARES Act creates an “above the line” deduction of up to $300 for charitable contributions of cash for taxpayers who do not itemize. If you normally do not itemize deductions, your charitable deductions will be tax-deductible up to the $300 limit.

Alternative minimum tax (AMT) exemption – AMT exemptions have been increased to $113,400 from $111,700 for joint filers ($56,700 from $55,850 for married taxpayers filing separately), and $72,900 from $71,700 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1,036,800 from $1,020,600 for joint filers, and over $518,400 from $510,300 for all others.

State and Local Taxes (SALT) – For 2020, state and local taxes deducted on Schedule A remain subject to a $10,000 limit ($5,000 for married taxpayers filing separately). SALT includes real & personal property taxes, income taxes and sales taxes.

Mortgage Interest Deduction – For taxpayers who can itemize deductions in 2020, mortgage interest on loans used to acquire a principal and second home is only deductible on debt up to $750,000 (MFJ)/$375,000 (MFS). Loans taken out prior to 12/16/17 remain grandfathered, thus not subject to the revised limits. Interest paid on home equity loans remain non-deductible, unless the loan proceeds are used to buy, build or improve a qualifying home.

Cash Stimulus Payments – The CARES Act provided for a cash payment of taxpayers of up to $1,200 per person ($2,400 for married couple) an additional $500 per qualified child. These payments were subject to AGI phase-out limitations. An advance payment was received in 2020 and a true-up will be determined on the 2020 tax return filing. If additional credit or refund is due taxpayer it will be reconciled on the 2020 tax return. However, if a taxpayer is overpaid, the excess amount received is not owed back.

Qualified Business Income Deduction – A deduction equal to 20 percent of “qualified business income”. Qualified business income is also known as “pass-through” income and includes income from partnerships, S corporations, LLCs, and sole proprietorships. The deduction is available to both itemizers and nonitemizers. The restrictions and limitation rules are complicated. The rules for taxpayers with taxable income at or below $163,300 ($326,600/MFJ) are less restrictive and simpler than those above the thresholds.

Bonus Depreciation Deduction – Bonus depreciation allows businesses to deduct 100% of the cost of qualifying property in the year placed in service. Used property qualifies for bonus depreciation with some restrictions. Bonus depreciation will be reduced after 2022.

The CARES Act fixes a legislative drafting error and allows Qualified Improvement Property (QIP) to be treated as 15-year property. This makes QIP, which is improvements to the interior portion of nonresidential real property, eligible for an immediate bonus depreciation deduction. This provision is retroactive to the TCJA act.

Section 179 Expensing – The Section 179 deduction increases to $1,040,000 and the phase-out threshold is increased to $2,590,000.

Lifetime Estate and Gift Tax Exclusion – Lifetime estate and gift tax exemption increased to $11,580,000 ($23,160,000 MFJ) if portability is elected and Form 706 is timely filed. The gift tax exclusion remains at $15,000 per taxpayer without having to file a gift tax return.

Given the broad nature of the tax reform, this letter barely scratches the surface of recent legislative changes. Effective tax planning requires a year-round effort each year as your overall financial position changes and especially within the uncertain tax environment we face. If you wish to discuss the provisions affecting you as well as the available tax strategies that would be appropriate to minimize your tax liability and maximize your tax savings, please call 216-491-8300 to set up a detailed discussion.

The majority of our employees continue to work in the office, but may work remotely as necessary. For the health and safety of our employees, clients, professionals and vendors, our offices are closed to in-person meetings and visits. Currently, all meetings will be conducted virtually via phone, email or video conference as scheduled by the participants. Clients needing to deliver paperwork to our offices can safely drop off items in our entranceway on a client drop-off shelf area during business hours, or use our secure outdoor drop-box at any time.

December 14, 2020 3:42 pm