Last Updated: January 7, 2020

We wrote last year about major retirement and pension legislation then making its way through Congress that would mark the first significant changes in that field in more than a decade. The legislation, known as the SECURE Act, has been signed into law. We anticipate having conversations with you if you are affected by any of the act’s wide-ranging provisions, which include raising the age for Required Minimum Distributions from 70½ to 72 and eliminating the “stretch” feature of inherited IRAs in some cases. Your portfolio manager has full details to share with you and can include your tax professional in their conversation with you.

At the start of a new calendar year, the IRS Tax Code again features some changes—most modest, a few potentially more significant—that we are factoring into the management of your financial assets. We’ll be sure to communicate any relevant adjustments to tax brackets, deductions, credits and retirement plan contributions and coordinate with your tax professional as needed. Highlights of these changes include*:

Standard deduction.

The standard deduction increases from $12,200 to $12,400 for individuals, and from $24,400 to $24,800 for married couples filing jointly.

Other common deductions.

For those that are itemizing, the mortgage interest, charitable gift, and medical (above 10% Modified Adjusted Gross Income) deductions, along with up to $10,000 state and local income tax deductions, are retained. Regardless of filing method, the increased standard deductions continue for blind or citizens 65 and over.

Alternative Minimum Tax (AMT).

For those individuals in higher income brackets, the AMT is retained, but exemption amounts are again increased. For singles, the exemption amount increases to $72,900, and for married couples filing jointly, the exemption increases to $113,400. AMT phases out at $518,400 for single filers and $1,036,800 for married taxpayers filing jointly.

Tax credits.

The child tax credit remains at $2,000, and the earned income tax credit ranges from $538 to $6,660, depending on number of children and income levels. Many states also have tax credits for various enterprises they wish to promote, as we discussed last quarter, and these credits are worth a more detailed discussion with your tax professional to determine if there are any in your home state you might explore further. Why are tax credits more valuable than tax deductions? Credits are dollar-for-dollar reductions in your overall tax bill, as opposed to deductions, which reduce the income on which you will owe tax, as illustrated below:

Retirement plan limits.

Employer plans such as 401(k), 403(b), most 457 and Thrift Savings Plan limits increase to $19,500 in 2020, with catch-up contributions of $6,500 for those over 50, while SIMPLE retirement accounts increase to $13,500.

Contributions to traditional IRAs.

The limit for 2020 is unchanged at $6,000, as is the “catch-up” contribution (for those over 50) of $1,000.

Roth IRA contribution income limits.

The phaseout range is $124,000 to $137,000 for single filers and $196,000 to $206,000 for married filing jointly filers. Rollovers from IRAs to Roths, often referred to as “back-door Roths,” are still allowed, although the amount rolled over will be taxed at normal income tax levels if the contributions were made with pre-tax dollars.

Annual gift tax exclusion.

The amount an individual can gift in any one year to any other individual remains at $15,000. If you want to make larger gifts, you might want to consider using part of your lifetime exemption. You may also increase that amount if you gift to a beneficiary through a 529 college savings plan, which allows you to put up to five years’ worth of contributions (or $75,000) into one recipient’s plan in one year, provided you don’t add to that same beneficiary’s plan again for the next four years. As always, gifts to your spouse are unlimited, as are gifts made directly to medical and educational facilities in another’s name.

Estate tax exemption.

The estate tax exemption notched up to $11.58 million per individual and remains portable between spouses. The federal estate tax for amounts over that can be as high as 40%, and some states have estate taxes and/or inheritance taxes as well. Check with your tax professional for details on your state and the effects to your beneficiaries.

No clawback of lifetime gifts.

With a drop in the threshold for taxable estates scheduled for 2025, the IRS recently announced there will be no clawback of lifetime gifts made between now and 2025 if the exclusion amount drops after 2025. From the IRS website:

“…individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.”

So, as 2020 unfolds, we will remain focused on managing your investments while staying abreast of the broader tax environment and sharing any developments we think might impact or be of interest to you.

*Source: Internal Revenue Service.

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