2020 Tax Update for the Tax Planner – Part 2

This is our second posting on the topic, so please check out Thursday’s blog, if you missed it.

There have been so many tax changes this year! As you might expect, it is difficult to cover them all. We’ll try to highlight a handful of changes that we think will be most relevant to you as a tax professional.

We’ll skip over the changes that are compliance-related, and focus on the provisions from the Secure Act that we feel will be most helpful when it comes to developing tax planning or helping our clients make shifts in order to minimize their tax liability.

Inherited Retirement Accounts

Historically, the “stretch” rule on inherited retirement accounts stipulated that the account inheritor must immediately start taking required minimum distributions. The ultimate formula is complicated and is based in part on the age of the person who died, but the key concept is that minimum distributions are required.

Under the Secure Act, that’s no longer the default treatment. Instead, the default treatment is that the retirement account must be fully distributed to the beneficiary by the end of the 10th calendar year following the year of the employee’s death. Whatever is left has to be depleted.

When the tax law gives us options, a tax planning opportunity exists!

We know that we have a 10-year horizon to get the money out and we can work with our clients to minimize the tax outcomes. Imagine your business has a great year and your marginal tax rate for that year is extremely high. Under the old rules, you couldn’t skip a distribution in that year. Under the new rules, you can!

However, the existing “stretch” rules still apply to a beneficiary that is a) a surviving spouse, b) a child who has not reached the age of maturity, c) a disabled individual under Section 72, d) chronically ill, or e) not more than 10 years younger than the employee.

Kiddie Tax Changes

The Kiddie Tax has been changing back and forth for quite a while. Children’s unearned income used to be taxed at the parent’s marginal tax rate. TCJA instituted a change and simplified the code by taxing children’s unearned income at estate/trust rates.

This change was easier to administer, but created a large disparity. State interest rates can be very punitive and you can reach the top rate (37%) on just $17,00 of unearned income. On the other hand, there’s a very low 10% bracket for minors without much unearned income.

For some, this change was a tax reduction. For others, it was a huge tax increase!

Under the Secure Act, for Calendar Year 2020 and beyond, we will revert to the old system where a child is taxed on unearned income at the parent’s marginal rate. And what about 2018 and 2019? We’re in a kind of limbo and Congress has said that you can elect to choose either method. This is a planning opportunity to select the option that is best for your clients during these two tax years.

Share This Post

More To Explore