Tax Planning for 2020

It’s time to start tax planning! Some years Congress tweaks the laws more than other years, but 2019 was a relatively quiet year for changes.
Here is what has changed:

Estate Tax Planning

• Applicable Exclusion rose from $11.4 million in 2019 to $11.58 million in 2020.
• GST Exemption rose from $11.4 million in 2019 to $11.58 million in 2020.
• Annual Exclusion for present interest gifts remained at $15,000.
• Annual Exclusion for gifts to a Noncitizen Spouse rose to $157,000 in 2020.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels. This isn’t really relevant for most Americans, however, if you have well in excess of these amounts, you may want to consider removing these amounts from your estate while you still have the Exclusion and Exemption to cover the transfers. You still have a few years until the law will change (unless the 2020 elections change things dramatically).

Property Tax Relief
Here in the state of Washington a new tax law went into effect for older and disabled residents who might qualify for property tax relief as the median county income rises.

Program Benefits:
The qualifying applicant will receive a reduction in the amount of property taxes due on property they own.  The amount of the reduction is based on the applicant's income, the value of the residence, and the local levy rates. If you own and occupy a primary residence in the State of Washington and have combined disposable income of Income Threshold 3 or less, you may qualify. Income thresholds can be found at dor.wa.gov/incomethresholds.

Income Tax Planning
Standard deduction amount:

• Married, filing jointly, increased from $24,400 in 2019 to $24,800 in 2020
• Single, increased from $10,200 in 2019 to $10,400 in 2020
• Head of household, increased from $18,350 in 2019 to $18,650 in 2020
• State and Local Tax (SALT) deduction cap remained at $10,000 in 2020

The income tax brackets also went up slightly.
As you plan for 2020, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Prior to then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year.

Let’s look at an example. John and Mary make $14,000 of charitable contributions to their favorite charity each year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 of deductions, so they’d be better off taking the standard deduction. Rather than giving $14,000 for each of the three years to charity, they could give 3 x $14,000 ($42,000) in one year and they’d get a much better tax result. If they gave $42,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $52,000 of deductions instead of the standard deduction of $24,800. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($24,800 in 2020). The charities would get their funds each year as usual, and John and Mary would get a much better tax result.

If you are considering how best to plan for the years ahead, it’s best to sit down with your estate planning attorney to discuss all your options. Bob Michaels of Smith Alling in Tacoma is here for you!
Schedule your FREE consultation today!