With 2020 coming to a close and the dawning of a new year, we need to think about… tax planning! In some years, Congress amends laws more than in others. While 2020 saw plenty of surprises regarding the coronavirus and elections, it was a relatively quiet year for legislative changes. However, even in a quiet year, some things change due to increased inflation, etc.
Real estate tax planning
The applicable exclusion increased from $11.58 million in 2020 to $11.7 million in 2021.
The exemption from GST increased from $11.58 million in 2020 to $11.7 million in 2021.
The annual exclusion of current interest gifts remains at $15,000.
The annual exclusion for gifts to a noncitizen spouse increased to $159,000 in 2021.
In a few years, at the end of 2025, the applicable exclusion and GST exemption will return to half their current levels, that is, to $5 million, adjusted for inflation from the 2011 base year. This is not appropriate for most Americans. However, if you have in excess of these amounts, you may want to consider removing these amounts from your estate while you still have an exception and exemption to cover transfers. You still have a few years before the law can be changed, unless Congress dramatically changes things before then.
Income Tax Planning
Standard Discount Amount:
Married, joint filing, increases from $24,800 in 2020 to $25,100 in 2021
One, increases from $12,400 in 2020 to $12,550 in 2021
Head of the household, from $18,650 in 2020 to $18,800 in 2021
The state and local tax deduction (SALT) cap remains at $10,000 in 2021
The income tax brackets also get a little higher.
As you plan for 2021, remember to keep receipts for expenses and charitable contributions. With the standard deduction amount high and the maximum state and local tax deductions remaining at $10,000, fewer taxpayers are itemized. In fact, the percentage of taxpayers who detail 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 detail. Prior to that, more than 31% of taxpayers were taxpayers. If you make a donation to a charity, you may want to aggregate your charitable contributions in one year and itemize them in that one year. You can do this by donating to a donor fund in one year. You can then submit grant recommendations from your donor fund each year. This way, tax planning won’t affect your favorite charities.
Let’s look at an example. John and Mary give $14,000 in charitable donations to their church or alma mater every year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 in deductions and it would be better for them to take the standard deduction ($25,100 in 2021). Instead of donating $14,000 every three years to charity, they could donate $3 x $14,000 ($42,000) in one year and they’d get a much better tax outcome. If they gave $42,000 in the first year of the Donor Advice Fund, in addition to their $10,000 SALT deduction, they would have $52,000 in deductions instead of the standard deduction of $25,100. In Years 2 and 3, they will only have a $10,000 SALT deduction and no charitable deduction but they can still take the standard deduction ($25,100 in 2021). Charities will get their money back each year as usual. John and Mary will get a much better tax result. In the first year, they’ll have $52,000 in deductions instead of $25,100, an increase of $26,900. Their deductions won’t change in Years 2 and 3. If John and Mary were in the higher income tax bracket, this increased deduction could save them nearly $10,000 in taxes.
A little planning can lead to a much better tax outcome. I wish you a happy, healthy and prosperous 2021!
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128