Cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for 2021 are as follows:

401(k), 403(b), 457 plans, and Thrift Savings Plan. Contribution limits for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $19,500. The catch-up contribution limit for employees aged 50 and over remains unchanged at $6,500.

SIMPLE retirement accounts. Contribution limits for SIMPLE retirement accounts for self-employed persons remains unchanged in 2021 as well at $13,500.

Traditional IRAs. The limit on annual contributions to an IRA remains at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.Continue reading

There’s never an off-season when it comes to scammers and thieves who want to trick people to scam them out of money, steal their personal information, or talk them into engaging in questionable behavior with their taxes. While scam attempts typically peak during tax season, taxpayers need to remain vigilant all year long.

For example, there are many reports of taxpayers being asked to pay a fake tax bill through the purchase of gift cards. While gift cards are a popular and convenient gift for all occasions, they are also a tool that scammers use to steal money from people.

Scammers often target taxpayers by asking them to pay a fake tax bill with gift cards. They may also use a compromised email account to send emails requesting gift card purchases for friends, family or co-workers. The IRS reminds taxpayers gift cards are for gifts, not for making tax payments.

The most common way scammers request gift cards is over the phone through a government impersonation scam. However, they will also request gift cards by sending a text message, email or through social media.

Continue reading

Congress is making some progress on a new COVID Relief Bill. If it advances, it would represent the first significant stimulus action since the CARES Act was passed in March of 2020. We don’t want to predict anything, as things are subject to change, however based on the progress we are seeing, we believe our clients should understand the provisions being proposed. Here is a link to the proposed Summary Framework of the Bipartisan Emergency COVID Relief Act of 2020 shared on December 9.

Here are some of the key items being proposed in the new bill:

Paycheck Protection Program: The bill would expand the PPP program to allow some businesses to receive an additional loan (eligibility would be limited to small businesses with 300 or fewer employees that have sustained a 30% revenue loss in any quarter of 2020). This bill would reverse the IRS decision and allow the deduction for expenses that result in PPP loan forgiveness. PPP forgivable expenses would be expanded to include supplier costs and investments in facility modifications and personal protective equipment (PPE) to operate safely. The PPP loan forgiveness process would be simplified for borrowers with PPP loans of $150,000 or less. New PPP funds would be dedicated for smaller borrowers and underserved communities. Funding would also be expanded for independent live venue operators affected by COVID-19 stay-at-home orders. Funding would be added for SBA loan products to increase guarantees on SBA 7(a) loans and reduce fees on 7(a) and 504 loans.

Unemployment Assistance: The bill would extend the pandemic unemployment insurance programs (created under the CARES Act) by 16 weeks. Those are set to expire in December and would, under the new relief package, now expire in April of 2021. The bill would also extend the federal supplement unemployment insurance benefits at half the former rate ($300 per week) from the end of December to April 2021.

Student Loan Extensions: The bill would extend federal student loan forbearance provisions through April 30, 2021 (currently set to expire on January 31, 2021).

Rental Assistance: The package would extend the eviction moratorium until January 31, 2021, which is a 1 month extension.

Liability Protections: The framework suggests that there is “Agreement in principle as the basis for good faith negotiations.” Providing liability protection for corporations has been a sticking in negotiations.

Stimulus checks were not included in the proposed package. The bipartisan agreement is still working its way through the legislative process and the provisions outlined above may not make the final bill, however we will provide an update as things progress.

 

By Matt Wheeler

Over the past decade, Americans have been the most generous people in the world. [1] This year, despite economic devastation caused by the Coronavirus pandemic, charitable giving had actually increased as of June by 7.5% year over year, according to the Q2 report released by the Fundraising Effectiveness Project. [2] What’s more, the number of “general donor” small gifts under $250 is up 19.2% year-to-date! These statistics contrast sharply with the narrative of ever-increasing divisiveness and animosity repeated in the months leading up to the November election. One thing is clear—in times of need, Americans help each other.

If you participated in charitable giving this year, or plan to, we want to provide you with tools and techniques to maximize the tax benefits of your gifts. Giving can take the form of time or money, and can be to family, friends, strangers, or organizations, but the US tax code only recognizes gifts of money or other property, and only when donated to qualifying 501(c)(3) charitable organizations. While we don’t want the tax tail to “wag the dog” as you develop your giving strategy, it is important to be tax-aware and tax-efficient in your charitable giving, if for no other reason than to minimize your tax liability legally, which will leave you with even more assets available for future generosity.

First, we will cover techniques for optimizing your current giving. Second, we will discuss tactical timing considerations for the short- to medium-term, and some helpful tools. Finally, we will touch on longer-term and more substantial giving strategies as part of your overall estate plan.

OPTIMIZING YOUR CURRENT CHARITABLE GIVING

Gifting Appreciated Property

The number one opportunity for gifting optimization that we encounter on a regular basis is converting cash donations to tax-efficient donations of appreciated property. Gifting cash to a 501(c)(3) charity is one of the least-efficient ways to conduct your charitable giving. Donating cash is, for the most part, a gift of after-tax money. Most taxpayers, when they receive cash—whether it be from compensation for services, the sale of assets, or portfolio or rental income—have already paid tax on it to the government. Yes, there are some tax-free sources of cash, but these are rare. That being the case, a tax-deductible donation can be made more tax-efficient by donating an appreciated asset that has been held long-term, such as equity securities or mutual funds.

Donating appreciated property held for more than one year yields a rare double benefit in the tax code. Upon donation of the appreciated asset, the donor receives a charitable deduction for the current fair market value of the property on the date of the donation. Furthermore, the donor does not recognize any taxable income on the built-in gain of the asset on donation. Thus, the taxpayer effectively gives the asset pre-tax and achieves a full-value deduction as well.

Example: Tax Rate Arbitrage

A simple example illustrates the point: Assume a stock with a value of $100 and an income tax basis of $25. The unrealized gain is $75. Selling the stock with a combined federal and state income tax rate of 25% would result in capital gains taxes of $18.75. The sales proceeds received, net of taxes, would be $81.25. The charity would then receive a donation of $81.25 and the taxpayer would receive a tax benefit of $24.38 at a 30% combined federal and state tax rate.

Consider instead if the taxpayer donates the stock directly to the charity. In this case, the charity would receive a stock worth $100 which it could then sell, tax-free, and receive $100 of cash. The taxpayer would likewise receive a charitable deduction totaling $100, the current fair value of the shares, and would receive an income tax benefit of $30 at a 30% combined federal and state tax rate. By donating the appreciated securities rather than donating cash, the charity ends up with an additional $18.75 and the taxpayer ends up with an additional $5.62. The only party losing out here is the government.

Qualified Charitable Distributions

For taxpayers over age 70 ½ another tax efficient means of donating is to donate cash directly from the IRA account to a qualifying 501(c)(3) charity in a Qualified Charitable Distribution.

Qualified Charitable Distributions (QCDs) can be used to satisfy minimum required distribution amounts. The main benefit of a QCD is that any qualifying distribution will reduce income recognized from the distribution dollar for dollar. While it might seem logical that the same effect could be achieved by receiving a distribution from the IRA account and then forwarding on the cash to a qualifying charity, this is not necessarily the case. For taxpayers currently itemizing their deductions and receiving full benefit of charitable contributions already, this is still not quite as tax efficient as the direct QCD.

Many calculation on the tax return, including the amount of social security that is recognized as taxable income as well as the amount of medical expenses that may be deducted in a given year, are a function of the amount of Adjusted Gross Income (AGI) a taxpayer has. A dollar of charitable contribution does not necessarily have the same impact in reducing taxable income as a direct reduction of income by a dollar “above the line”. By reducing income dollar for dollar via a QCD, a taxpayer can reduce AGI and thus may receive additional benefits by reducing the amount of Social Security that is taxable or increasing the amount of allowable medical expenses, or numerous other calculations impacted by AGI.

The impact of this strategy is even more profound for taxpayers who take the standard deduction or do not itemize deductions. These individuals receive little to no tax benefit from donating cash or appreciated property to charity personally but receive the full benefit if they donate directly from their IRA using a qualifying distribution.

CARES Act Deduction

Another technique available for 2020 as a result of the CARES Act passed in the spring is that all taxpayers who take the standard deduction will be permitted an “above the line” deduction for qualifying cash donations made to charities of up to $300.

SHORT- AND MEDIUM-TERM CHARITABLE GIVING STRATEGIES

If you’ve come this far, you should be planning to take our advice to maximize the tax efficiency of your charitable giving—perhaps you are already doing so! Next, we will discuss timing considerations for short- and medium-term time horizons for charitable giving. Our primary goal is to minimize the taxes you pay over your entire lifetime, not to merely focus on the year to year tax consequences of transactions you undertake. The timing of a charitable deduction you take can be a key factor in determining the tax savings you receive.

Example: The “Income Spike”

Let’s assume you are having a great income year: you received an especially large bonus, cashed out some stock, or sold some other assets, pushing you a bracket or two higher than where you normally wind up. This year you have an “income spike”. While this is a first-class problem to have, it is still a problem. An income spike is not tax efficient. The incremental increase in your income this year is subject to a higher tax rate than it otherwise would be if spread out over a few years, or perhaps even if it was paid next year.

Let’s further assume you are getting cashed out of a large amount of stock and will be retiring next year, expecting a substantial drop in income for at least several years. If your bracket is a combined federal and state rate of 40% in the high-income year and a combined federal and state rate of 25% in the lower-income years, then you are being taxed an extra 15% on that incremental income in the high-income year. Further, a deduction in the low-income years yields you a 25% tax savings while that same deduction in the high-income year may yield you a 40% tax savings! So, for a $100 charitable donation, you save an additional $15 by claiming the deduction in the high-income year as opposed to the lower income year.

One solution to this dilemma is to simply increase your charitable giving substantially in the high-income year as opposed to the lower income years. In many ways, however, this is not desirable—you have now set the bar much higher for your giving to the charity in the high-income year. Imagine the disappointment when you tell them you are scaling back the giving the following year! The better solution is to separate the timing of the charitable deduction for income tax purposes from the charity’s actual receipt of the gift. To do this efficiently, we recommend the use of a Donor Advised Fund.

Donor Advised Funds

A Donor Advised Fund (DAF) is an account setup with a custodian (most major brokerages have versions of this) which is set aside permanently for charitable purposes.

• Gifts made to the account are irrevocable—you may not claim the money back, and
• Any money inside the account must be distributed to qualifying 501(c)(3) charities

Because of the irrevocable nature of the gifts to the account, and the requirement that any assets in the account be distributed only to qualifying charities, the IRS permits you a charitable deduction upon your gift to the account. This allows the donor to have full control over the timing of the charitable gift, which is a key advantage in the examples described above.

Now in your income spike year, you can increase your charitable giving via the DAF, thus maximizing your tax benefit, while not increasing your annual giving to the charities you have in mind. Because you receive a charitable deduction when the account is funded, no additional contribution deduction is recognized when the assets are transferred to charity.

The DAF also has the added practical benefit of being an easy vehicle by which to transfer appreciated securities. While you can donate appreciated securities direct to a qualifying charity, it often involves complexities like substantial paperwork and identification of specific lots of shares. But when using a DAF, most major brokerages make it a simple and seamless process that can be done entirely online. When the gift is finally made to the charity from the DAF, the charity receives a check, meaning less paperwork on the charity’s end as well.

For all these reasons, we regularly recommend the use of a DAF in conjunction with other tax-efficient strategies to maximize the tax-efficiency of your charitable giving.

LONG-TERM CHARITABLE GIVING STRATEGIES

We have now covered some tax efficient tactical techniques for making charitable donations as well as taking advantage of tax-rate arbitrage opportunities with short to medium term considerations in mind. The final techniques relate to the big picture—long-term planning for charitable giving and philanthropic endeavors as part of a broader estate plan.

There are numerous tools available to taxpayers who seek to be tax efficient in their giving. You can keep things simple or get as complicated as you want. With increased complexity you can often obtain increased tax efficiency, but typically at a much higher price in terms of rules, record keeping, and of course, fees to the attorneys, accountants and financial advisors assisting you. Before getting too into the weeds on technical complexities, approach the broader philosophical considerations first:

• How much do you wish to leave to your heirs?
• What do you want your legacy to be?
• Do you wish to remain Anonymous in your giving?
• Do you wish to build a family legacy of giving and philanthropy?

These questions are uniquely personal in nature and you should reflect on them with your loved ones and trusted advisors.

Inter Vivos Gifting

There can be numerous tax advantages to “bringing forward” legacy gifting plans by making inter vivos gifts during life.

Consider the taxpayer that wishes to leave 25% of their $10M estate to charity. That is an extremely generous $2.5M gift to charities of the taxpayer’s choosing. However, at current estate tax exemption amounts, for a married couple, there is no estate tax benefit to the gift as there would be no estate tax otherwise due. Further, there would be minimal, if any, income tax benefit, as all assets generally under current law would receive a “step up” in income tax basis upon death.

Instead, consider if this gift was spread over a number of years prior to death. Current income tax benefits could be obtained by such gifts, as well as the satisfaction of seeing them put to use. A proper plan to shift this gifting forward could yield well into six figures of income tax savings over several years, leaving more in the estate which could ultimately pass to heirs or charity. Again, the only loser in this situation is the government.

High level techniques range from QCD planning with IRA distributions, charitable trusts designed to provide income streams during life and a current charitable deduction with the remainder reverting to charity upon death, Donor Advised Funds (DAFs) as discussed previously, long-term family foundations that build a philanthropic legacy, and more. The key here is deciding on your long-term plans, then discussing options with your advisors to determine if available income and estate tax benefits outweigh any costs or negatives.

SUMMARY

December is the giving season! There are numerous techniques available to you to maximize tax efficiency in your charitable giving. Consider:

• Donating appreciated assets held more than one year for increased tax efficiency
• Getting tactical on timing—take advantage of rate arbitrage between years, and use tax efficient vehicles such as Donor Advised Funds (DAFs) to do so
• Donating directly to Charity from your IRA via Qualified Charitable Distributions (QCDs) if over age 70
• If you plan on claiming the standard deduction for 2020—taking advantage of the $300 above the line deduction from the CAREs Act
• Reviewing your broader estate plan to determine how your charitable giving goals can be done in a tax efficient manner

The techniques listed in this article can result in three, four, five, six or seven figure tax savings for some taxpayers. Are you working with a qualified CPA or EA that will assist you in maximizing your tax efficient charitable giving? Our guess is that, if you are not, the long-term savings of making the switch will dwarf any increase in fees. Please contact us to learn more, and spread the word about these incredible tax saving techniques.

Matt Wheeler, CPA, is the Managing Partner of Wheeler Accountants LLP, a full-service accounting firm located in the heart of Silicon Valley. Matt works primarily with individuals on comprehensive tax strategies, specializing in equity compensation, serial entrepreneurs, venture capitalists and ultra-high-net-worth individuals. He is also the co-host of the Avocado Toast Podcast, a Podcast for HENRYs (high earner, not rich yet) and millennials to help them make smart financial decisions.

[1] https://www.cafonline.org/docs/default-source/about-us-publications/caf_wgi_10th_edition_report_2712a_web_101019.pdf

[2] Fundraising Effectiveness Project Quarterly Fundraising Report Q2 2020

Troubling Guidance from the Treasury Department

Everyone that has been involved with any part of Payroll Protection Program (PPP) loans knows that it is a process fraught with complication – rule changes, complex calculations, and mounds of paperwork.  Additionally, behind the scenes, there has been a battle of the concept of Congressional intent vs. IRS Enforcement.  When the CARES act was passed by Congress on March 27, 2020, their intent was the PPP funds would be tax free. This came to a head November 18th, with the release of Revenue Ruling 2020-27.  With this ruling, the IRS is taking the controversial position that expenses paid with the PPP funds are not deductible on a 2020 return if forgiveness of the loan is reasonably expected to occur.

This means that if your financial statements currently contain expenses that you paid with PPP funds – and these funds are eligible for loan forgiveness – as the law stands, the expenses will not be deductible from your 2020 income. This is regardless of whether forgiveness is obtained by year end or not.  This would impact most PPP recipients.

Revenue Procedure 2020-51 was additionally released and provides a safe harbor for those who guess wrong on the outcome of forgiveness. It provides procedures for correcting the mistake in either direction – for when a taxpayer assumes forgiveness and therefore does not deduct expenses and is subsequently denied, or assumes non-forgiveness and then later determines forgiveness.

Wheeler’s position is that if there is doubt about your forgiveness status, it is recommended that your return is extended until you are more certain.

The Silver Lining

Two United States Senators, Chuck Grassley (R) & Ron Wyden (D), released a statement November 19th stating that this guidance “misses the mark” on the spirit and intention of the PPP program per the CARES Act.  They have indicated that they will continue their efforts to address this with year end legislation.  While we are hopeful that the spirit of this law with regards to the deductibility of these expenses will eventually be realized, we need to stress that it is important to consider the rules as they stand today, and to be prepared for either outcome.

Wheeler Recommendations

As always, everyone’s situation will be unique.  However, there are some common threads that are important to focus on considering this news.

• If you received PPP funds, you will want to be gathering the information required for calculating forgiveness – payroll records, proof of payment for rent, mortgages, utilities, retirement contributions, etc. – so you can have your forgiveness calculation determined as soon as possible.
• Your tax planning for 2020 will need to consider that this forgiveness will add to your taxable income for the year as the law currently stands. This means you will also want to have a good idea of your 2020 financial position, in addition to knowing your forgiveness calculation.  This doesn’t mean that you need to write a check to the IRS just yet – you can work with your tax preparer on the best plan for you and your business.

Bottom Line

• If you received PPP funds in 2020 and are expecting full or partial forgiveness, you will want to understand how this impacts your 2020 taxable income.
• It is important that you gather your materials for your forgiveness application as soon as possible so you know where you stand.
• Your tax planning this year may involve multiple scenarios, and you will want to understand the potential impacts.
• Wheeler is here to help with any of the above! Contact your tax preparer directly or the PPP Team at ppp@wheelercpa.com.