The Tax Cuts and Jobs Act temporarily doubled the federal gift and estate tax exemption through 2025. Adjusted for inflation, the exemption currently allows an individual to transfer up to $11.7 million free of federal gift or estate tax in 2021 (up from $11.58 million in 2020). Married couples can shield up to $23.4 million from those taxes in 2021.

These sizable exemption amounts create an attractive opportunity to minimize taxes on your wealth by gifting business interests or other assets to family members before they drop to their previous levels of $5 million and $10 million, respectively (adjusted for inflation) on January 1, 2026.

Some affluent families have been reluctant to take advantage of this opportunity for fear of a “clawback.” In other words, they are worried that a portion of their pre-2026 gifts may be clawed back and subject to estate taxes if the exemption amount is lower when they die.

Although Congress didn’t appear to intend such a result, a literal reading of the tax code suggested that previous gifts could be added back into one’s estate and subject to tax based on the exemption amount in effect in the year of death. Fortunately, IRS regulations finalized in November 2019 provide assurances that this won’t happen.

© 2020

January 15 — Individual taxpayers’ final 2020 estimated tax payment is due.

February 1 — File 2020 Forms W-2 (“Wage and Tax Statement”) with the SSA and provide copies to your employees.

· File 2020 Forms 1099-NEC (“Nonemployee Compensation”) reporting nonemployee compensation payments with the IRS and provide copies to recipients, along with a related Form 1096 (“Annual Summary and Transmittal of U.S. Information Returns”) to the IRS.

· Most employers must file Form 941 (“Employer’s Quarterly Federal Tax Return”) to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (“Employer’s Annual Federal Tax Return”).

· File Form 940 (“Employer’s Annual Federal Unemployment [FUTA] Tax Return”) for 2020. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

· File Form 943 (“Employer’s Annual Federal Tax Return for Agricultural Employees”) to report Social Security, Medicare and withheld income taxes for 2020. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

· File Form 945 (“Annual Return of Withheld Federal Income Tax”) for 2020 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

March 1 — File 2020 Form 1099-MISC (“Miscellaneous Income”) reporting certain payments to certain persons and provide copies to recipients, along with a related Form 1096 (“Annual Summary and Transmittal of U.S. Information Returns”) to the IRS.

March 15 — 2020 tax returns must be filed or extended for calendar-year partnerships and S corporations. If the return isn’t extended, this is also the last day for those types of entities to make 2020 contributions to pension and profit-sharing plans.

© 2020

For many, December 31 means a New Year’s Eve celebration. From a tax perspective, however, it should mean thinking about the filing status you’ll use when filing your tax return for the year. The one you use depends partly on whether you’re married on that date.

The five statuses

When you file your federal tax return, you do so with one of five filing statuses. First, there’s “single” status, which is generally used if you’re unmarried, divorced or legally separated. A second status, “married filing jointly,” is for married couples to file a tax return together. If your spouse passes away, you can usually still file a joint return for that year. A third status, “married filing separately,” is for married couples who choose to file separate returns. In some cases, doing so may result in less tax owed.

“Head of household” is a fourth status. Certain unmarried taxpayers qualify to use it and potentially pay less tax. Finally, there’s a fifth status: “qualifying widow(er) with a dependent child.” It may be used if your spouse died during one of the previous two years and you have a dependent child. (Other conditions apply.)

Head of household

Let’s focus on head of household status because it’s often misunderstood and can be more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as a dependent.

A “qualifying child” is defined as someone who lives in your home for more than half the year and is your child, stepchild, foster child, sibling, or stepsibling, or a descendant of any of these. A qualifying child must also be under 19 years old (or a student under age 24) and cannot provide over half of his or her own support for the year.

Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.

For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep and food consumed in the home. Medical care, clothing, education, life insurance and transportation aren’t included.

Under a special rule, you can qualify as head of household if you maintain a home for a parent even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.

Not always obvious

Filing status may seem obvious, but there can be situations in which it warrants careful consideration. If you have questions about yours, contact us.

Sidebar: Can you be married and a head of household?

You must generally be unmarried to claim head of household status. However, if you’ve lived apart from your spouse for the last six months of the year, you have a qualifying child living with you and you “maintain” the household, you’re typically considered unmarried. In this case, you may be able to qualify as head of household.

© 2020

Among the primary goals of estate planning is to put in writing how you want your wealth distributed to loved ones after your death. But what if you want to use that wealth to help a family member in need while you’re still alive? This has become an increasingly common and pressing issue this year because of the COVID-19 pandemic and changes to the U.S. economy.

One way to help family members hit hard by job loss or increased debt is through an intrafamily loan or even by establishing a full-fledged family bank.

Structure loans carefully

Lending can be a way to provide your family financial assistance without triggering unwanted gift taxes. As long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift.

This means, among other steps, documenting the loan with a promissory note and charging interest at or above the applicable federal rate (which is now historically low). You’ll also need to establish a fixed repayment schedule and ensure that the borrower has a reasonable prospect of repaying the loan.

Even if taxes aren’t a concern, intrafamily loans offer important benefits. For example, they allow you to help your family financially without depleting your wealth or creating a sense of entitlement. Done right, these loans can promote accountability and help cultivate the younger generation’s entrepreneurial capabilities by providing financing to start a business.

Maybe open a bank

Too often, however, people lend money to family members with little planning or regard for potential unintended consequences. Rash lending decisions may lead to misunderstandings, hurt feelings, conflicts among family members and false expectations. That’s where a family bank comes into play.

A family bank is a family-owned and funded entity — such as a dynasty trust, a family limited partnership or a combination of the two — designed for the sole purpose of making intrafamily loans. Often, family banks can offer financing to family members who might have difficulty obtaining a loan from a bank or other traditional funding sources, or lend at more favorable terms.

By “professionalizing” family lending activities, a family bank can preserve the tax-saving power of intrafamily loans while minimizing negative consequences. The key to avoiding family conflicts and resentment is to build a strong governance structure that promotes communication, decision making and transparency.

Establishing guidelines regarding the types of loans the family bank is authorized to make — and allowing all family members to participate in the decision-making process — ensures that family members are treated fairly and avoids false expectations.

Learn more

More than likely, someone in your extended family has faced difficult financial circumstances this year. Contact us to learn more about intrafamily loans and family banks.

© 2020

As we approach the end of 2020, now is a good time to review any mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprises

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, determine how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution, so you’ll owe taxes on the gain without actually achieving an economic benefit.

Seller beware, too

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2021 — unless you think you’ll be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods (known as the specific identification method), thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond taxes

Investment decisions shouldn’t be driven by tax considerations alone. You also need to know your risk tolerance and keep an eye on your overall financial goals. Nonetheless, taxes are still an important factor. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

© 2020

It’s been more than two years since the U.S. Supreme Court ruled in South Dakota v. Wayfair that states may require out-of-state sellers to collect sales and use tax even if they lack a physical presence in a state. Since that time, most states that have a sales tax have enacted “economic nexus” laws that expand the reach of their sales tax collection obligations beyond their borders.

Many of these laws are similar to the one upheld in Wayfair. It applies to sellers that, on an annual basis, deliver more than $100,000 in goods or services into the state or engage in 200 or more separate transactions for the delivery of goods and services into the state. Some states have eliminated the number-of-transactions threshold, to avoid applying their laws to small sellers, such as those that sell 250 items at $1.50 each.

Since the COVID-19 pandemic was declared, online transactions have soared. If your business sells products or services in states in which it lacks a physical presence, review the economic nexus laws in those states and assess their sales-tax-compliance impact. Also, some states have issued specific guidance on whether telecommuting employees temporarily working in a state because of the COVID-19 crisis create nexus for an employer who doesn’t operate in that state. We can help you explore and respond to these matters.

© 2020

There’s a tax-advantaged way for people to save for the needs of family members with disabilities — without having them lose eligibility for government benefits to which they’re entitled. It can be done through an Achieving a Better Life Experience (ABLE) account, which is a tax-free account that can be used for a variety of expenses.

Eligibility

ABLE accounts can be created by eligible individuals to support themselves, by family members to support their dependents, or by guardians for the benefit of the individuals for whom they’re responsible.

Eligible individuals must be blind or disabled — and must have become so before turning age 26. They also must be entitled to benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) programs. Alternatively, an individual can become eligible if a disability certificate is filed with the IRS for him or her.

Other key factors

Distributions from an ABLE account are tax-free if used to pay for expenses that maintain or improve the beneficiary’s health, independence or quality of life. These expenses include education, housing, transportation, employment support, health and wellness costs, assistive technology, personal support services and other IRS-approved expenses.

Anyone can contribute to an ABLE account. While contributions aren’t tax-deductible, account funds are invested and grow tax-free. If distributions are used for nonqualified expenses, the portion of the distribution that represents earnings on the account is subject to income tax plus a 10% penalty.

An eligible individual can have only one ABLE account. Contributions up to the annual gift-tax exclusion amount, $15,000 in 2020, may be made to an ABLE account each year for the benefit of an eligible person. Under a rule that took effect in 2018, if the beneficiary works, the beneficiary can also contribute part or all of their income to the account. (This additional contribution is limited to the federal poverty-line amount for a one-person household for the prior year.)

There is, however, a limit on the total account balance. This limit, which varies from state to state, is equal to the limit imposed by that state on qualified tuition (Section 529) plans. For contributions made before 2026, the designated beneficiary can claim the saver’s credit for contributions made to his or her ABLE account.

Plenty of options

There are many choices. ABLE accounts are established under state programs, but an account may be opened under any state’s program if the state allows out-of-state participants. Funds in an account can be invested in a variety of options and the account’s investment directions can typically be changed up to twice a year. Contact us if you’d like more details about setting up or maintaining an ABLE account.

Sidebar: Impact on Supplemental Security Income

Achieving a Better Life Experience (ABLE) accounts have no impact on an individual’s Medicaid eligibility. However, ABLE account balances in excess of $100,000 are counted toward the Supplemental Security Income (SSI) program’s $2,000 individual resource limit.

Thus, an individual’s SSI benefits are suspended, but not terminated, if his or her ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account to pay housing expenses count toward the SSI income limit.

© 2020

If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be tax-deductible as ordinary and necessary business expenses. Unfortunately, every type of environmental cleanup expense cannot be currently deducted — some cleanup costs must be capitalized (spread over multiple years for tax purposes).

Of course, to lower your tax bill as much as possible, you want to claim as many immediate income tax benefits as allowed for the expenses you incur. So, it’s a good idea to explore the tax impact of business property remediation before you embark on the project. (If you’ve already done the cleanup, review the costs closely before filing your company’s tax return.)

Deduct vs. capitalize

Generally, cleanup costs are currently deductible to the extent they cover “incidental repairs” — for example, encapsulating exposed asbestos insulation. Other deductible expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, and environmental “audit” and monitoring costs.

You may also be able to currently claim tax deductions for cleaning up contamination that your business caused on your own property (for example, removing soil contaminated by dumping wastes from your own manufacturing processes and replacing it with clean soil) — if you acquired that property in an uncontaminated state.

On the other hand, remediation costs generally must be capitalized if the remediation:

· Adds significantly to the value of the cleaned-up property,

· Prolongs the useful life of the property, or

· Adapts the property to a new or different use.

In addition, you’ll likely need to capitalize the costs if the remediation makes up for depreciation, amortization or depletion that’s been claimed for tax purposes, or if it creates a separate capital asset that’s useful beyond the current tax year.

However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For instance, in one case, the IRS required a taxpayer to capitalize the costs of surveying for contamination various sites that proved to be contaminated, but the agency allowed a current deduction for the costs of surveying the sites that proved to be uncontaminated.

Complex treatment

Along with federal tax deductions, state or local tax incentives may be available for cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, we can help plan your efforts to maximize the deductions available.

© 2020

When it comes to retirement planning, many people tend to focus on two things: opening a retirement savings account and then eventually drawing funds from it. However, there are other important aspects to truly doing everything you can to grow your nest egg.

One of them is celebrating your 50th birthday. This is because those age 50 or older on December 31 of any given year can start making “catch-up” contributions to their employer-sponsored retirement plans by that date (assuming the plan allows them). These are additional contributions to certain accounts beyond the regular annual limits.

Maybe you haven’t yet saved as much for retirement as you’d like to. Or perhaps you’d just like to make the most of tax-advantaged savings opportunities. Whatever the case may be, now is a good time to get caught up on the latest catch-up contribution amounts.

401(k)s and SIMPLEs

Under 401(k) limits for 2020, if you’re age 50 or older, you can contribute an extra $6,500 after you’ve reached the $19,500 maximum limit for all employees. That’s a total of $26,000. If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $13,500 in 2020. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $16,500 in total for the year. (Be sure to check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.)

Self-employed plans

If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the regular yearly aggregate deferral limit of $19,500, plus a $6,500 catch-up contribution in 2020. But that’s just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation. The total combined employee-employer contribution is limited to $57,000, plus the $6,500 catch-up contribution.

IRAs, too

Catch-up contributions to non-Roth accounts can not only enlarge your retirement nest egg, but also reduce your 2020 tax liability. And keep in mind that catch-up contributions are available for IRAs, too.

However, the deadline for 2020 contributions is April 15, 2021, and deductible contributions may be limited or unavailable based on your income and whether you’re covered by a retirement plan at work. Please contact us for more information.

© 2020