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SouthState Private Wealth Year-End Tax Reminders

SouthState Private Wealth Year-End Tax Reminders

While we are all likely in a hurry to see the calendar-page turn and put the year 2020 behind us, there is still time remaining to reflect on your financial and tax situation before December 31st. Given the delayed results of the November Senate elections, we are unsure of the direction of tax policy for 2021 and beyond. However, 2020 brought its own tax changes that may give rise to new planning opportunities. Here are a few points to consider as we close out 2020. Please consult your tax advisor to see how these ideas apply to your unique tax situation.

Changes to tax policy with The Cares Act

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed March 27, 2020. This comprehensive bill provided direct support to individuals and businesses impacted by the virus and subsequent economic disruptions. Two changes to existing tax policy included in The Cares Act that could directly impact your 2020 tax filings relate to required minimum distributions (RMDs) from a qualified retirement plan and the deduction for cash charitable contributions. 

Waiver of Required Minimum Distributions for 2020

The required minimum distribution (“RMD”) requirements from qualified retirement plans were waived for calendar year 2020. This allowed taxpayers that did not need the cash flow from their RMD to leave that money in the retirement plan and reduce current year taxable income, as well as allow the investments time to recover from the decline in the stock market. This relief was available for all taxpayers. 

Planning Notes:
  • If you chose not to take your RMD, your “ordinary” income for 2020 could be significantly lower than previous years. This may provide an opportunity to have a portion of your realized capital gains (and qualified dividends) taxed at 0%. For taxpayers filing as Married Filing Jointly, the first $80,000 of capital gain income is subject to the 0% rate. Typically, your ordinary income “fills up” these lower brackets under the ordering rules. 
  • If your adjusted gross income (AGI) is significantly lower in 2020 without your RMD (or from a decrease in wages or business income), your potential itemized deduction for medical expenses could be more beneficial. For taxpayers that itemize their deductions, medical expenses are deductible to the extent they exceed 7.5% of AGI. For many taxpayers this threshold prohibits a meaningful deduction for medical expenses. Consult with your CPA to determine if it would be worthwhile for you to compile your medical expenses for 2020. Keep in mind that medical expenses that qualify for a deduction include: unreimbursed payments for doctors, dentists, or other medical practitioners; hospitals and nursing homes; acupuncture; weight-loss programs for doctor-diagnosed diseases; prescription drugs, dentures, glasses, contacts, certain transportation costs, and insurance premiums for medical care or long-term care insurance if paid out of pocket after taxes.
  • The waiver of the RMD does not prohibit a taxpayer from making a direct charitable contribution of up to $100,000 from their IRA during 2020 and excluding that distribution from taxable income. In prior tax years, this Qualified Charitable Distribution (QCD) would count towards satisfying your required minimum distribution, while not being included in your adjusted gross income (AGI) on your Form 1040. This allows taxpayers that do not itemize to receive a benefit from their charitable contributions. However, for 2020, determining if this strategy is more advantageous than donating from a taxable account must be made on a case-by-case basis.
Increase in deductions for certain cash charitable contributions 

The Cares Act included two provisions to incentivize charitable contributions during 2020. A new $300 above-the-line charitable deduction for taxpayers that claim the standard deduction on their Form 1040. This deduction is for “qualified” contributions made during 2020, defined as cash contributions to charitable organizations other than non-operating private foundations and donor advised funds. 

The Cares Act also waived the traditional 60% AGI limit for cash contributions made during 2020. This allows a taxpayer to make and deduct qualified contributions, as defined above, of up to 100% of their AGI for 2020. The deduction above 60% of AGI would not include contribution carryovers from previous tax years.

Planning notes:
  • While cash donations qualify for the higher AGI limits for 2020, there are still tax advantages to contributing appreciated stock. The deduction for the contribution of appreciated stock you have held for more than one year to a public charity is the fair market value of the stock at the date of donation rather than its cost basis. Importantly, the donor never has to recognize and pay income tax on the capital gain. Contributing appreciated stock can also be a useful tool when diversifying away from a concentrated stock position that includes a large unrealized gain. The AGI limit on appreciated stock donations is 30%, however, you can combine these strategies and give appreciated stock up to 30% of your AGI while then supplementing with qualifying contributions made in cash to receive a combined donation of up to 100% of your AGI. 
  • While this is not new to the Cares Act, 2017 legislation significantly increased the standard deduction available to taxpayers on Form 1040.   For the charitably inclined, this increase potentially limited the tax deduction available for charitable gifts.  Carefully planning the timing of your contributions could create the opportunity to itemize and deduct charitable contributions in certain years, while using the standard deduction in other years when no contributions are made. Combining this with the increase in AGI limitations, you could “bunch” your planned charitable contributions for the next several years into 2020 to take advantage of the increased AGI limitations, while also increasing your itemized deductions to exceed the standard deduction. 
Other items to consider

Planning for the $10,000 limit on deduction for state taxes    

The state taxes (income, property, and sales) allowed as an itemized deduction under The Tax Cuts and Jobs Act of 2017 was limited to a total of $10,000.  The repeal of this “SALT” cap has been part of the discussions around tax reform should control of the Senate change in 2021.

Planning Notes:
  • Many states had or created programs that allowed payments to qualified state-created charities to be treated as if made directly to the state as income tax payments. The impact of this was to recast those payments as deductible charitable contributions rather than state taxes that may be nondeductible if the taxpayer’s total state taxes exceeded $10,000. In June 2019, the IRS issued final regulations that reduced a taxpayer’s charitable deduction dollar for dollar for any state tax credit allowed. Please note that in South Carolina, the Exceptional Needs program can still accept appreciated stock for payment of state income taxes. While you will not receive a federal charitable income tax deduction, you can utilize the appreciated value of the stock to pay your state income taxes without having to recognize the capital gain on the stock
  • While the repeal of the SALT cap may not come to fruition in 2021, if you have already reached your limit of $10,000 in state taxes paid during 2020, you should defer any additional state payment to 2021 ( 4th quarter state estimates on January 15, 2021, property taxes due in January 2021, etc.). 
Funding a 529 Savings account or making other gifts to utilize your annual gift tax exclusion

The IRS allows each taxpayer to make a gift to an individual up to an “annual exclusion” amount without having to pay gift tax or having the gift count against your lifetime estate and gift tax exemption. The gift tax annual exclusion amount for 2020 is $15,000 per donee. While determining your proper gifting strategy should be part of an overall estate plan review, one popular way for taxpayers to utilize their annual gift exclusion is through the funding of a 529 savings plan, as contributions to these plans are considered gifts for estate and gift tax purposes.  A donor even has the option to elect to make five (5) years’ worth of annual exclusion amounts in a single year’s contribution and allow those funds to grow tax-free until needed.  Many states, including South Carolina, also allow income tax deductions for contributions made to their state sponsored plans. 

A 529 plan is a tax advantaged way to save for college, and now elementary and secondary school. The earnings accumulate tax-deferred while qualified withdrawals for certain educational expenses are free from federal income taxes. The donor can be the owner of the account and therefore still have control of the funds and retain the ability to change the designated beneficiary. 

Please note: tuition paid directly to a school is not considered a gift and would not utilize your annual exclusion amount. This could be beneficial when trying to maximize your nontaxable transfers each year. However, the state income tax deduction allowed for the 529 plan contribution would be lost when the tuition is paid directly. Taxpayers should weigh the benefits of paying tuition directly to the educational institution versus using a 529 account for a student currently enrolled in school.  

Your South State Wealth Advisor would be happy to work with you and your tax advisor to fully explore any of the topics mentioned above.
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  • All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.
    South State Wealth represents the collective departments and subsidiaries of South State Bank, N.A. that provide wealth management services. Products and services are not bank deposits, nor are they FDIC insured, and are not backed or guaranteed by South State Bank, N.A. or its affiliates. Securities involve investment risks, including possible loss of principal.
    This material is furnished for use by South State Wealth clients and subscribers to this report, and may not be redistributed, retransmitted or disclosed without our express written consent. Any unauthorized use is prohibited. We do not provide legal, tax or accounting advice. This material should not be construed as individual investment advice, since such advice is dependent on your specific investment objectives, financial situation, or particular needs. You should consult with us regarding these matters. Neither South State Bank, N.A. nor any director, officer or employee of South State Bank, N.A. accepts any liability for any direct, indirect or consequential damages or losses arising from any use of this material.
    This material is based upon information that we consider reliable, but we cannot guarantee its accuracy, timeliness, or completeness. Opinions expressed are those of the author(s), and are current as of the date written. Neither the information nor any opinion expressed constitutes an offer or recommendation to buy or sell any security. South State Bank, N.A., its affiliates, officers, directors, employees, including persons involved in the preparation or issuance of this material may own, buy or sell securities of companies mentioned. Index results assume the reinvestment of all dividends and interest; no index can be directly purchased or sold.
    Copyright 2020 South State Bank, N.A. All Rights Reserved South State Bank, N.A., 1101 First St. South, Winter Haven, FL 33880.

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