As 2019 draws to a close and a new decade dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. This was a relatively quiet year for changes. Still, even in a quiet year, some things change due to inflation increases, etc.
Estate Tax Planning
Applicable Exclusion rises from $11.4 million in 2019 to $11.58 million in 2020.
GST Exemption rises from $11.4 million in 2019 to $11.58 million in 2020.
Annual Exclusion for present interest gifts remains at $15,000.
Annual Exclusion for gifts to a Noncitizen Spouse rises 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 the law is set to change unless the 2020 elections change things dramatically.
Income Tax Planning
Standard deduction amount:
Married, filing jointly, increases from $24,400 in 2019 to $24,800 in 2020
Single, increases from $10,200 in 2019 to $10,400 in 2020
Head of household, increases from $18,350 in 2019 to $18,650 in 2020
State and Local Tax (SALT) deduction cap remains at $10,000 in 2020
The income tax brackets also creep slightly higher, as well.
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 church or alma mater each year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 of deductions and they’d be better off taking the standard deduction. Rather than giving $14,000 for each of 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 just as usual. John and Mary would get a much better tax result.
A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2020!
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128