At the end of a typical year, advisers connect with their clients to analyze and address deadlines and time-sensitive opportunities that will soon expire. But this is not a typical year. With the confluence of new legislation, rules and regulations, a global health pandemic and high-stakes elections, layers of complexity compound upon otherwise routine planning matters.
We started the year trying to understand the impact the SECURE Act would have on our clients. Within a few months, we also had to assimilate the CARES Act provisions into our planning. And just when we think we have the rules straight, we now have to consider planning opportunities that might expire in 2020 if President-elect Joe Biden’s tax proposal becomes a reality (in whole or in part), as well as the prospect of additional legislation recently proposed as follow-up to the SECURE Act (the Securing a Strong Retirement Act of 2020). In combination, these developments have created a very confusing landscape in which to plan.
We have outlined below several significant planning issues that have changed this year (or may change after this year), to help you modify and streamline your year-end processes in light of our current reality.
Income Tax Planning
At the close of each calendar year, your clients have an opportunity to assess their taxable income and implement strategies to control their tax liability. The customary exercise of managing income, deductions, gains and losses is further complicated this year by new legislation and the prospect of a post-election overhaul of the tax code.
In addition to some minor income tax changes made by the SECURE Act (e.g., the reinstatement of the pre-2018 kiddie tax rules), the CARES Act introduced coronavirus-related distributions, which some of your clients may have taken. It is important to be mindful of how these new rules might affect your clients when setting reasonable expectations for tax time.
Looking forward, many clients may be negatively impacted under Biden’s income tax proposal. The threat of increased rates for the top tax bracket, capped deductions, the elimination of the QBI deduction and 1031 exchanges for certain high earners, and ordinary income tax treatment for capital gains and qualified dividends above a threshold, may weigh in favor of accelerating income and deductions into 2020.
RMD Planning
For clients who own traditional retirement accounts and have reached their required beginning date (RBD), satisfying their RMD is an annual to-do. The news at the start of this year was that the SECURE Act delayed the RMD age from 70½ to 72 for taxpayers born on or after July 1, 1949. Then, in March, the CARES Act waived RMDs for 2020 altogether. Clients who will reach RMD age after this year, as well as those with inherited IRAs, are affected by these two changes, and it’s important to adjust your advice and planning accordingly.
Looking forward, the IRS has issued final regulations to update the life expectancy tables and the distribution period table to reflect current mortality data. These new tables will be used to calculate RMDs in 2022 and beyond. In addition, the Securing a Strong Retirement Act of 2020 could push the RMD age back further, to age 75. These changes may seem small, but they could have a large impact on your clients and your future recommendations.
Retirement Savings
Because of annual contribution limits, each year opens a new window of opportunity for retirement savings. Reviewing contributions to employer plans and IRAs is an annual exercise (although clients have until their tax filing deadline to contribute to IRAs), ensuring that clients contribute as much as they are able to save in tax-preferred accounts.
It is important to remember that the SECURE Act repealed the age restriction (previously 70½) for traditional IRA contributions. Accordingly, your clients with compensation income can make, and potentially deduct, contributions to these accounts regardless of their age.
Looking forward, the Securing a Strong Retirement Act of 2020 has proposed an increase in catch-up contributions to retirement accounts at age 60, up to a limit of $10,000 per year ($5,000 for SIMPLE IRAs). Further, under Biden’s tax proposal, the retirement planning landscape could again shift dramatically. It is important to understand the potential changes and their impact on clients, and weigh the incentives to pursue different saving strategies. For example, if the deduction for traditional account contributions is replaced by a flat credit, Roth options may become more advantageous.
Charitable Giving
You likely have clients who wait until year-end to make charitable gifts. New rules, concerns regarding the pandemic and the outcome of the elections may have a significant effect on your clients’ charitable giving plans.
First, for those fortunate enough to be in a position to make gifts, 2020 may be a crucial year to provide support to charitable causes, as many individuals and institutions are suffering. Conversely, clients may be struggling to uphold pledges or fund their philanthropic goals. In any case, your year-end discussions regarding charitable gifts will be different in 2020, due to the ongoing pandemic.
On the legal front, note that the SECURE Act maintained the QCD age at 70½, despite increasing the RMD age to 72. For 2020, the CARES Act added an above-the-line deduction of up to $300 for certain cash donations made by taxpayers who claim the standard deduction, and it removed the 60 percent AGI limitation for most cash gifts to public charities.
Finally, politics and your clients’ beliefs regarding the likelihood of future legislation may also affect the timing and nature of their charitable gifts. For those who would be negatively affected under Biden’s tax proposal, accelerating major gifts to capitalize on deductions may be advisable. Donor-advised funds and split-interest trusts may be attractive to those clients contemplating substantial charitable gifts this year.
Annual Gifts and Gift Tax Planning
Year-end is a popular time to make gifts to loved ones, utilizing clients’ annual exclusion amounts to minimize taxable transfers. In light of the pandemic, certain family members may be in greater need of support this year, and clients may wish to increase the amounts and/or recipients of their 2020 gifts. Further, with the pandemic-induced market volatility, in-kind gifts of securities or other non-cash assets may be leveraged to capitalize upon low valuations.
Estate Planning
With the federal estate and gift tax exemption increasing each year, and the possible repeal or phase-out of state estate or inheritance taxes (depending upon residency), an estate plan review is a prudent year-end measure. In 2020, on account of the sweeping changes made by the SECURE Act, a detailed assessment of wealth transfer strategies is critical for clients who own significant retirement assets. The new 10-year-rule for non-eligible designated beneficiaries has been a catalyst for major revisions to beneficiary designations, trusts that administer retirement accounts and the overall flow of assets and funding of bequests. The implication of someone inheriting an IRA and subsequently having to deplete it within 10 years is a serious planning issue to address. But, in light of the pandemic and the CARES Act, further discussions may be necessary.
To add further complexity, a Biden presidency could have a drastic effect on your clients’ estate plans. Biden has outlined sweeping changes that, if implemented, could eliminate the step-up in basis at death, reduce the federal estate and gift tax exemption back to $3.5 million and increase the estate tax rate to 45 percent. For clients with strong fears regarding the risk of the proposed changes and strong desires to use credit amounts that may soon disappear, lifetime transfers should be discussed and any actions should be completed before year-end. Irrevocable trusts, including SLATs, IDGTs, GRATs and CLATs, can maximize the use of the current unified credit amount (and simultaneously take advantage of low valuations and applicable rates).
2020 has been challenging, and year-end planning is no exception. It can be overwhelming to develop recommendations for clients given all the changes that went into effect this year and more possible changes coming down the road. While the profession may take months or years to identify new planning strategies, the landscape remains in a constant state of flux. As you engage in end-of-year planning conversations, remember the special considerations that make this year different and tailor your advice accordingly. Your expertise and efforts during these trying times will be of considerable benefit to your clients.
Emily Macintosh is the senior resource editor of fpPathfinder, and Michael Lecours is the co-founder of fpPathfinder.