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Tax in the Time of COVID

By Karen McMillan, CFP
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A prescription for year-end financial planning.

Welcome to October 2020, month seven in what some are calling the New Abnormal.   Like many people, I’m growing a little tired of my four walls, and I continue to be grateful for the active bird and insect life in the trees outside my window.   And like others, I too have been engaged in cleaning out my closets, dropping expired prescriptions at the drugstore disposal, and scanning then shredding old paper tax returns and receipts.  I also started the initial preparations for the 2020 tax filing, and thought of some of the pandemic and/or election generated tax situations that we might want to consider in addition to the regular checklist of end-of-year tax planning items. 

Many people have used this time to make changes to their homes, and if you have engaged in renovations, don’t forget to keep your receipts as capital expenditures can be used to increase the tax cost basis of your home, and decrease the subsequent capital gain liability on a future sale.

Staying within our four walls; one question that we are now often asked is whether unreimbursed employee expenses can be deducted.  Although many of us are now working from our home office/dining room table, there has been no COVID-19 update to the Tax Cuts and Jobs Act (TCJA) legislation passed in December 2017 that disallowed the deduction of miscellaneous employee business expenses.  That means no deduction for the home office or business supplies, but on the positive side, many people have seen their commuting costs decrease significantly.

Teachers are eligible for a small educator expense deduction of $250.  The deduction is available to educators employed for at least 900 hours at a state-certified kindergarten to grade 12 school.  Parents acting as de facto teacher’s aides do not qualify. 

We all can deduct up to $300 in charitable donations without itemizing thanks to the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act.  If you were not keeping track of your charitable donation receipts knowing that you would be taking the standard deduction, now is the time to go back and collect at least $300 worth. 

Even though Required Minimum Distributions (RMDs) from retirement accounts can be waived for 2020, it is still possible to make a Qualified Charitable Donation from your IRA directly to a charity.  The amount will not count for the $300 charitable donation deduction mentioned above, but the distribution does not get included into your taxable income either.  For more details on the Cares Act, please reference Lia Whisler’s article in our April 2020 Quarterly Wealth Report, which can be found at, or call us for a printed version.

In July, Dan Haut wrote an article on financial planning tips for 2020 which continues to be relevant, especially in light of a possible Biden presidency.  Your Portfolio Counselor can provide more information about Roth conversions and Donor Advised Fund charitable contributions.  Dan’s article can be found at  or call us for a printed version.

We will not know until after the election whether it is a good use of time to learn about the possible tax changes of a Biden presidency.  However, regardless of who wins, the 2017 Tax Cuts and Jobs Act (TCJA) legislation contains sunset provisions for the tax brackets to increase and the estate tax exemption amount to decrease at the end of 2025.  As you may recall, the sunset of the brackets and the estate tax exemption was necessary to meet the cap of the $1.2 trillion price tag of the bill.  Given the massive amount of monetary and fiscal COVID-19 spending, fiscal pressures will make it unlikely to expect future politicians to extend those brackets, so some tax bracket legislative change is highly probable, and with a Biden presidency, the tax changes could be as early as 2021.    

Perhaps the most significant tax rate change pertains to families whose assets are greater than $10 million. Today the lifetime gift and estate tax exclusion amount is $11.58 million per person, and $23.16 million for a married couple.  This is a “use it or lose it” benefit.  By 2025 under the sunset provisions, or possibly by next year with a Biden presidency the lifetime exemption could revert to $5 million per person (adjusted for inflation). 

If a person makes an $11.58 million gift in 2020 and dies in 2026, the exclusion used in calculating the unified gift and estate tax in 2026 will be $11.58 million, not $5 million.  However, if a person makes a $5 million gift in 2020 and dies in 2026, the exclusion used in calculating the unified gift and estate tax in 2026 will be $5 million (adjusted for inflation) not $11.58 million.  If the federal gift and estate tax rate is 40%, you can quickly see that a married couple using the full exclusion would save $5.264 million in taxes for their heirs over the couple who did not make use of the $23.16 million exclusion amount. 

Of course, in order to make use of the current exclusion amount, the assets need to be gifted now, creating other complications.  If you feel that you may fall into this category, it is important to meet with an experienced estate planning attorney as soon as possible to explore the pros and cons of estate gifts and the available methods of making those gifts eligible for the current lifetime gift and exclusion amount of $11.58 million per person.

Other than the reduction of the gift and estate tax exclusion, planning for the majority of the proposed Biden tax changes can be done before the end of the year if necessary.  Based on preliminary reports, the numbers that would suggest a change of financial planning strategy are:

· Income in excess of $400,000

· Income and capital gains in excess of $1 million

· Itemized deduction (including charitable) and a marginal tax rate in excess of 28%

If you fall into one of the categories above, and there is a Biden presidency, please call us so that we can talk about the impact on your personal situation. 

Regardless of the outcome of the election, it is generally worthwhile to take some time for an end-of-year review of capital gains and losses, charitable gifting, gifts using the annual gift tax exclusion amounts of $15,000 and a reassessment of upcoming cash needs.   As always, we, your Portfolio Counselors, Client Service Specialists, and everyone at Osborne Partners, are here for you and welcome a conversation from within our four walls with you in yours. 

Karen McMillan, CFP

Karen McMillan, CFP

Karen is a Portfolio Counselor at OPCM with over 20 years of experience in the financial services industry. She has a broad range of experience that includes working with clients on comprehensive financial planning, wealth management strategies, stock option strategies, tax planning, and insurance. Over her two decades she has not only become a CERTIFIED FINANCIAL PLANNER™ practitioner (2006), but has accumulated ten additional professional qualifications.
The opinions expressed herein are strictly those of Osborne Partners Capital Management, LLC ("OPCM") as of the date of the material and is subject to change. None of the data presented herein constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an investment decision. There is no guarantee that the investment strategies presented herein will work under all market conditions and investors should evaluate their ability to invest for the long-term. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance. The information contained in this report is for informational purposes only and should not be deemed investment advice. Although information has been obtained from and is based upon sources OPCM believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. Past performance is not indicative of future results. Inherent in any investment is the possibility of loss.