With changes in Washington around the corner, we took a look at Biden's platform to indicate what types of changes might be on the horizon. Given the ongoing uncertainty related to control of the Senate, it’s difficult to know how much of Mr. Biden’s platform will become law. Nevertheless, now is a good time to be planning ahead. In addition, under the CARES Act, there are several strategies that can reduce your tax burden in 2020 if you act before the new year.
Unique Tax Planning Strategies in 2020 Charitable Planning with the CARES Act Three strategies to consider this year:
- Increase your giving and reduce your income tax — a win, win!
The Tax Foundation estimated that only about 14% of taxpayers itemized in 2019. If you are part of the 86% of American taxpayers who did not itemize in 2019, you may be able to write off an extra $300 this year. In 2020, taxpayers may deduct a charitable contribution of up to $300 in addition to their standard deduction.For those who plan to itemize, charitable donations might be even more beneficial than usual this year. Individuals with larger charitable contributions may be able to deduct more as the limits for cash gifts have been temporarily modified from 60% to 100% of AGI with excess amounts being carried over for the next five years. It should also be noted that the AGI limits applicable to gifts to a donor-advised fund or private foundation were not increased.
- Exercise your way to a deduction
Donors with stock options may be able to exercise their options and apply their gains as a gift, then enjoy the tax benefit in the form of a deduction of up to 100% of AGI.
- Utilize QCDs
Qualified Charitable Distributions, or QCDs, enable individuals who are age 70. and older to donate up to $100,000 from an IRA directly to a charity, while excluding some or all of the amount donated from their taxable income. Though RMDs are waived for 2020 under the CARES Act, if you intend to make a charitable contribution in 2020, it may still be more tax efficient to utilize QCDs as the distributed amount would otherwise be subject to income tax when distributed in future years.
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There are a few strategies to consider that could result in lower transfer taxes in the event Biden’s proposal becomes law:
Reminder — RMD Rules Have Changed in 2020
Required minimum distributions (RMDs) are waived for most retirement plans including 401(k), 457(b), 403(b) and IRA account owners as well as beneficiaries for 2020.
Bringing it all together
Biden’s platform impacts how certain groups of people might approach charitable giving. Raising the top marginal long-term capital gains rate by approximately 20% for those with income above $1 million would make donating appreciated securities and avoiding capital gains quite compelling for those taxpayers. On the other hand, capping itemized deductions at 28% for anyone earning $400,000 or more, de-incentivizes charitable giving for such taxpayers.