Highlights of 2020 Tax Law Changes

Generally, we need no reminder that the 2020 calendar year has been filled with changes. However, it does seem worthwhile to highlight some of the more relevant tax law changes that have impacted our client families. Specifically, for those taxpayers in Arizona or with significant amounts of Arizona-source income, the passage of Proposition 208 could represent a material increase in your state income tax liability. Please contact your tax professional if any of the items enumerated herein apply to you or your family.

Federal Income Taxes

Net Operating Losses (“NOL”s)
  • Carryback of losses arising in taxable years beginning January 1, 2018 through December 31, 2020 may now be carried back to each of the five taxable years preceding the taxable year of such loss.
  • The limitation that NOLs may only offset 80% of taxable income now only applies to years beginning after January 1, 2021.

Limitation on Excess Business Losses of Non-corporate Taxpayers (Section 461(l))
  • The limitation on deduction of excess business losses for taxpayers, other than corporations, no longer applies for tax years beginning after December 31, 2017 and before January 1, 2021.

IRA or Qualified Plan Required Minimum Distributions (RMDs)
  • Individuals can elect to forgo RMDs for the 2020 tax year.
  • Increase in Age for RMD
  • The first year in which a taxpayer is required to take an RMD has been increased to the year the taxpayer turns 72.
  • New first year requirement only applies to distributions required after December 31, 2019, with respect to individuals who attain age 70 ½ after such date.

Modification of Minimum RMD Rules for Designated Beneficiaries (Stretch IRAs)
  • The entire interest in an IRA or defined contribution plan is now required to be distributed to a designated beneficiary within 10 years of the death of the owner.
  • An exception exists for eligible designated beneficiaries, such as surviving spouses, who may be able to take distributions over their lifetime.
  • Generally, applicable to distributions with respect to individual who die after December 31, 2019.

Repeal of Maximum Age for Traditional IRA Contributions
  • People over the age of 70 ½ may now make deductible contributions to a traditional IRA so long as the other requirements of deductible IRA contributions are met.
  • Deductible IRA contributions made after age 70 ½ may reduce the amount you can donate to charity to reduce your taxable IRA distributions.
  • Effective for contributions and distributions made for taxable years beginning after December 31, 2019.

Charitable Contribution Deductions
  • The adjusted gross income limitation was suspended for cash charitable contributions made in 2020.

“Kiddie Tax” Modifications
  • “Kiddie Tax” has reverted to pre-2017 Tax Cuts and Jobs Act where parents’ effective tax rate is used to calculate tax on eligible children’s investment income
  • Applies to taxable years beginning after December 31, 2019.

Business Interest Limitation (Section 163(j))
  • For tax years beginning in 2019 and 2020, the limitation has increased to 50% of adjusted taxable income (ATI)

Expansion of Section 529 Plans
  • Provides that tax-free treatment for higher education expense distributions also applies to certain expenses for: (1) a registered apprenticeship program’s required fees, books, supplies, and equipment; and (2) qualified education loan repayments of up to $10,000, with a separate accounting for siblings.

State Income Taxes

Arizona Proposition 208
  • Beginning in 2021, Proposition 208 would apply a 3.50% surtax on income, including capital gains, above $250,000 (single filing) or $500,000 (joint filing). This would raise the maximum state income tax rate for high earners to 8%. All incomes at or below $250,000 (single filers) or $500,000 (joint filing) would be taxed at current rates. The surtax is a marginal tax increase so the effective tax rate increase affects taxpayers more as they move up the taxable income scale. Below are two tables illustrating the impact to single and married filing jointly filers respectively.
  • It does appear that the surtax will apply to any income taxable in Arizona whether the taxpayer is a resident or nonresident of Arizona. It is not clear whether the surtax will apply to trusts that are resident in Arizona or trusts with Arizona source income.
  • Revenue received from the extra 3.50% income tax would be distributed as follows:
    • § 50% of the funding going towards hiring and increasing the base compensation for teachers and classroom support personnel, such as nurses and counselors.
    • § 25% going towards hiring and increasing the base compensation of student support services, such as classroom aides and transportation.
    • § 12% would go towards funding the Career Training and Workforce Fund, which establishes career and technical programs for grades 9-12 (including vocational training programs, mentoring, and mental health services).
    • § 10% going towards mentoring and retention programs for new teachers.
    • § 3% would go towards the Arizona Teachers Academy to increase scholarship funding amounts.

California Assembly Bill 1253
  • Currently, California imposes a 13.3% income tax for taxable income above $1,000,000. If Assembly Bill 1253 is passed, the proposed tax brackets for high-income taxpayers for the 2020 tax year (retroactive) will be as follows:
As of the last update issued on August 3, 2020, the bill is still being actively considered in committee within the California legislature.

 

Sources:
https://www.natlawreview.com/article/cares-act-relevant-tax-summary
https://www.journalofaccountancy.com/issues/2020/jul/secure-act-tax-changes.html
https://apps.arizona.vote/info/assets/18/0/BallotMeasures/I-31-2020.pdf
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB1253

Important Disclosures:
Information was obtained and collected from a variety of public resources. We believe this information provided here is reliable, but do not warrant its accuracy or completeness. It is provided for informational purposes only, and should not be construed as legal or tax advice. Laws may change pursuant to the administration’s legislative agenda. Always consult an attorney or tax professional regarding your specific legal or tax situation. TFO Phoenix, Inc. is not engaged in the practice of law.

TFO Phoenix, Inc. is an SEC registered investment advisor and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.