COVID-19 has turned everything upside down, spun it around a couple times, and left us all dizzy and confused. However, as the days tick by we continue to gain a deeper understanding for what has and is happening, and what may happen in the future. This gives us CPAs the ability to help our business and individual clients plan with slightly more clarity. I will emphasize the word slightly, because like everyone says these are unprecedented times.
COVID-19 has brought with it health and financial scares. In a recent post we discussed tax strategies that businesses can implement to help increase cash flow. In an effort to provide individuals with some of the same insight, we have listed 7 tax savings strategies they can implement. You can also listen to a brief overview of these strategies on our latest episode of “Tax in Ten: Individual Tax Saving Strategies During Covid-19.”
7 Individual Tax Saving Strategies:
- Individual charitable contribution limit for 2020. Under the CARES Act, Individuals can elect to deduct cash donations up to 100% of their 2020 adjusted gross income (up from 60% previously).
- Individual charitable contribution above the line deduction up to $300. This particularly helps those who do not normally itemize their deductions, and would typically not get any tax benefit for donations. This is a big deal due to the fact that the Tax Cuts and Jobs Act (TCJA) dramatically reduced the number of taxpayers who qualified for itemized deductions. If you already itemize your deductions, you cannot take the $300 deduction, there is no double dipping. It is an incentive to give in 2020, and have less taxes owed in 2021. This is important, because right now is when people need philanthropy the most.
- Making gifts to use increased lifetime exemption from tax reform. Right now gifts allow a taxpayer to take advantage of the increased exemption before it expires. They also shift the future income and appreciation to lower generations.
- Property tax assessment reviews and appeals. Assessed property values will lag true market value in an economic recession. Property tax appeals generate cash savings for clients by challenging assessed values, generating above the line savings, and reduce property tax rates and cash tax outlays. There may also be the potential for early payment discounts to further reduce property tax cash costs.
- Wealth transfer using trusts. With super low interest rates, the grantor retained annuity trust and sale of assets to an intentional grantor trust are great techniques for shifting future appreciation and income to subsequent generations. If you have already established grantor retained annuity trusts or completed sales to intentional grantor trusts, you may want to consider substituting assets with the trust at these low values, and start up new gifts / sales with lower values.
- Temporary waiver of Required Minimum Distributions (RMDs). The provision, according to the bill, provides relief to individuals “who would otherwise be required to withdraw funds from such retirement accounts during the economic slowdown due to COVID-19.” If not for this relief, 2020 RMDs would be based on the account value at December 31, 2019, when the market was in a much better place. The RMD waiver also applies to inherited IRAs.
- Special rules for retirement funds. As with other disaster related relief, the CARES act waives the 10% early withdrawal penalty for disruptions, up to $100,000 from qualified retirement accounts for coronavirus related purposes. To qualify for this relief, withdrawals have to be made on or after 1/1/2020.
Often a disaster, such as a tornado, a hurricane, or a flood, only impacts a piece of the population. This is the first disaster, in living memory that has impacted nearly 100% of a global population. 401 (k) plans, and other retirement funds are going to feel the pressure, as more and more people are requesting hardship withdrawals. How long will this last? Still fairly unknown, because like everyone says these are unprecedented times.