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PODCAST: YEAR-END TAX PLANNING 2020

Podcasts

  • Transcript

    Introduction:
    The following is a special podcast edition of a recent BMT Perspectives webcast recorded in September 2020. Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jennifer Fox, president of BMT Wealth Management.

    Jen Fox:
    Good afternoon. Welcome to our BMT Wealth Management perspectives webcast on year-end tax planning for individuals and business owners at BMT Wealth Management, we connect you to a life fulfilled. We lead with advice and planning. Through our planning process, we’ve seen the significant impact taxes can have on our clients wealth. At times, the combination of income, capital gains, gift and estate taxes can have a bigger impact on portfolios and investment performance. In this election year, there are tax proposals presented by each candidate that can have a significant influence on your near and long-term planning. We know that our collaboration with you and your team of advisors can help you identify solutions that fulfill your purpose and promise. We’re excited to provide you with today’s panel discussion to discuss these opportunities. A bit of housekeeping before we get started. At the bottom of your screen, you’ll see a box for questions. I know some of you have found it is that we already have questions waiting for us in the queue, but feel free to submit any questions you may have for the panelists. If we’re not able to get to the questions and answer them during the presentation, we’ll be sure to follow up with you after. I’d like to now introduce you to Paul Gaudio, our wealth planner strategist based in our Princeton office, who will be the moderator for today’s session. Paul?

    Paul Gaudio:
    Thanks Jen. Good afternoon, everyone. And welcome to another Bryn Mawr Trust Wealth Perspective series. As Jen indicated, today’s topics are year-end tax planning strategies. So allow me to introduce our panel members: first, our very own Jen Marshall, an enrolled agent and director of Bryn Mawr Trust entire tax department; Howard Vigderman is a tax attorney with Montgomery McCracken, where he chairs the firms trust and estate practice in Rachel Kieser, a CPA and shareholder in the accounting firm of Drucker & Scaccetti. So Jen, let’s start with you. The elephant in the room of course, is the upcoming election. We have a huge budget deficit, a potential shift in control of Congress. What changes can we expect if the incumbent wins and if Biden wins.

    Jen Marshall:
    Thanks, Paul. I know it is a hot topic for so many individuals. I know that by how often my phone is ringing. Folks are, you know, very, very interested in this. I’m going to jump right into the differences in the tax proposals for each of the candidates. Generally when we’re talking about Trump tax proposals I think one of the things to keep in mind is that he is looking to extend more or everything that was part of the original tax cuts and jobs act that he introduced that was written in at the end of 2017 and enacted for 2018. So when we talk about individual tax rates the Biden proposal would take the current top rate of 37% and would move that back up to 39.6%. His platform is that that would be for those individuals with taxable income, over $400,000.

    Jen Marshall:
    And Donald Trump has actually said to for his platform, he would be looking to reduce the current 22% bracket down to 15%. So there you know, we definitely see a difference on those platforms, they’re pretty radical. Talking about investments though in capital gains, qualified dividends right now, the top rate for that is 20%. And there were also able to enjoy the zero and 15% tax rate for those capital gains. So Donald Trump has proposed actually reducing the capital gains tax rate by getting rid of the top marginal rate of 20% and leaving that or having the top percent at 15%. And the Biden platform is proposing that ordinary income tax rates on capital gains and qualified dividends for income that is over a million dollars. So I think I’m assuming that would be a graduated, a graduated rate.

    Jen Marshall:
    And lastly, when we’re talking about estate gift and GST taxes we currently have a very large estate, you know, lifetime exemption that is available for individuals at $11.58 million. And of course, double that for spouses and the plan or Donald Trump’s plan is to extend that Joe Biden’s plan is looking to potentially reduce that to 5 million. I’ve actually even seen some commentary that have quoted it at 3 million. And of course that is significant. When we talk about the differences in the availability of those exemptions and what it means for year end planning and more importantly also the Biden proposal talks about eliminating the step-up in basis for upon appreciated property. And there’s, it’s not, there’s not real clear guidance as to how that would be carried out if it would trigger a capital gain at the death or if it would be a carry over basis situation for those that would inherit.

    Jen Marshall:
    And so I, I realized this is a lot of information too, and as a disclaimer not that this is a political opinion of mine, but I, I do want to note as well, because we’re talking about year end planning, as you think about these things,. Also consider that these are of course proposals. And so when I looked back at the Trump proposals and what his platform was in 2016, you know, he had originally introduced it. There would only be three tax brackets, and there are actually still seven tax brackets. He talked about completely eliminating the net investment income tax and also eliminating the alternative minimum tax for individuals, which we did see a large increase in the exemption. For folks that was a great benefit, but it was not actually eliminated. The point here being you know, that we can’t, and it’s not something we can hang our hats on, but it’s certainly something we need to include in our discussion for year-end planning.

    Paul Gaudio:
    Thanks, Jen, I assume given the potential changes in tax rates, one of the strategies that people most likely are contemplating is a Roth conversion. Can you give me some, some idea of what a candidate would look like today for consideration of a Roth conversion?

    Jen Marshall:
    Absolutely. Paul it’s I’ve heard it described as the perfect storm for year end tax planning this year with so many different things coming into play. So I think you look around and you see there’s a potential some folks have lower taxable income this year for many reasons. They could have a COVID pandemic impact to their income. We also have you know, with the elimination of the required minimum distribution on the IRAs for 2020 folks also have taxable income. And of course, with having lower taxable income that can provide an opportunity for you then to go ahead and figure out an amount you can convert into a Roth and then realize all the, all the benefits of that tax the growth that will then be tax-free in addition to that and I realize on the platforms, you know, there’s a lot of different talk about what will happen with the tax rates.

    Jen Marshall:
    But I don’t think that they’re likely to be less than 37% up at the very highest tax rates. So I think this is a very good time to be considering that. And then we’ll also need to look as we near it near the year end of course, if there’s a decline in the stock market that would of course represent a lower conversion cost for folks as well. So I think there’s a lot of scenarios. I think it’s going to be very important for year end tax planning to sit down and be talking with your advisor and to be very, very careful with that. We always need to be mindful with Roth conversions as well. We need to be mindful of your ultimate taxable income, because that impacts the amount that you pay for your Medicare premiums. If you’re paying for those, it can also potentially trigger the net investment income tax, which is 3.8%. And the other thing that I want to highlight as well is that with the secure act, we no longer have the ability to unwind or undo that conversion as we had had in prior years. So once that conversion does take place, you are locked in for that. So something to be very wary of.

    Paul Gaudio:
    Thanks, Jen. So lots of variables as always with tax planning. Rachel, then in response to the covert pandemic, the CARES Act was enacted in, in March of this year to provide some stimulus and relief. Can you give us a brief overview of, of what the provisions of the act are.

    Rachel Kieser:
    Sure. yeah, so the CARES Act provides some provisions for businesses and also for individuals. So just give a brief overview of some of the business provisions that are still kind of applicable now. Even though it’s been about six months almost to the date. So the first one is the paycheck protection program. I’m sure a lot of you have already heard about the PPP. There’s a lot of press about that. I think the application period is as closed, but now we’re kind of pivoting towards when do you apply for forgiveness?

    Rachel Kieser:
    Initially the, the loan period, the amount of the time to use the loan was eight weeks, but they back with some more guidance and extended that to 24 weeks. So actually the payments on the loans don’t begin until eight, sorry, 10 months after the 24 week loan period. So there’s plenty of time to do planning related to when to apply. So typically there would be a 24 week period unless you elected to be, to use the eight week period, but most, I think are using 24 weeks. So, and then there was a question of, well, if I don’t have forgiveness until 2021, because the IRS has come back and said that any funds that you use to pay expenses, those expenses are not going to be deductible. So you will have an increase in taxable income for that PPP loan forgiveness, even though it wasn’t really the intent of Congress.

    Rachel Kieser:
    We haven’t heard any more guidance on that lately on when we don’t know if we will. But that’s also something to keep in mind. If you do have a PPP loan and you’re making quarterly estimates, it might seem like your income might be down this year, but it could potentially be higher because of that PPP loan. So something to be aware of for your January 15th estimated payments, and then a couple more things related to payroll. The CARES Act provided a deferral of the FICA taxes. So business wouldn’t have to pay in the FICA taxes to the government for a certain period. And this year they’ll pay 50% at the end of next year, and then another 50% at the end of 2022. So it’s like an interest free loan from the government. And then also another employee retention credit for keeping employees on the payroll during the pandemic. If you have to be cognizant though, if you have a PPP loan, you can do the payroll tax deferral, but not the employee retention credit. So just need to be aware of that.

    Rachel Kieser:
    And then moving on to the individual provisions a lot of people received their, they should have received their economic impact payments. So the $1,200 payments that went out earlier in the year probably April or May. But if there are non filers, it’s possible that they haven’t gotten their payments yet. So the just keep in mind for that. There’s an IRS non filer tool on the IRS website. If anyone needs that and then you can actually also go on and put your direct debit information in there. So they will send you a direct debit instead of a check. This is a little bit safer, probably. Also on the individual side the CARES Act provides some retirement account relief. So the big one people probably have heard of is that the IRA required minimum distribution rule was suspended for 2020.

    Rachel Kieser:
    And in coordination with that, if someone was required to start their RMDs in 2019, but they elected to defer it to 2020, which is always possibility. They don’t even have to take it in 2020. They could defer that until 2022 as well. So if you’re in either one of those buckets, or if you’re going to start it in 2019 or 2020, have some leeway there they also put through a relief for which provides for penalty-free withdrawals from retirement accounts of up to a hundred thousand dollars. So that’s for 2020 only, but it’s for those. And maybe it won’t be extended, who knows, but at this point, right now, it’s only for 2020. So it’s for people who were diagnosed with COVID-19 or they had a spouse that was diagnosed with COVID-19 or if they experienced adverse financial impact from being quarantined or furloughed.

    Rachel Kieser:
    And they had to stop working because they had to watch their kids. So that, that is something to keep in mind and they that actually only applies to the 10% penalty. So when you take money out of an IRA or a 401k, that’s taxed at ordinary income rates, but if you take out early, there’s also a 10% penalty. So you’re, so this provides relief from that penalty, but you’re still taxed on it. So going further with that thought, the typically if you took a hundred thousand dollars out in 2020, it would be a hundred thousand dollars of taxable income in 2020, the CARES Act provided that if it’s a COVID related distribution, you have to pick up that income, recognize it in over a three year period instead. So we’ve got a half a third in 2020, then 2021 and 2022.
    Rachel Kieser:
    So you kind of deferred the tax impact for two thirds of it for a couple of years. And then they also created some additional allowances for a plan loans, which is, I think we discussed yesterday, but it was like yesterday was the last day you could do that, but allowed for plan loans up to a hundred thousand dollars for loans made within a 180 days of March 27th. And then on top of that, any outstanding loan payments that were supposed to be due at December 30, first of this year, they’re delayed until next, the end of next year.

    Paul Gaudio:
    Thanks, Rachel. I was just going to say in some of those, some of those early distributions, right. They can also be really contributed back over a period of time?

    Rachel Kieser:
    Yes. I think it’s over the same three year period. Yeah. So if you took the money out, but you want it back in, right, so if you took the money out, when you want it back in the, in the 401k or the IRA in order to continue to grow tax deferred, just usually the play on the retirement accounts, you can contribute it back over that three year period. That’s right.

    Paul Gaudio:
    Thank you. Howard, much attention has been given to the, to the current gift GST and estate tax exemption you know, many estate planners, accountants, financial planners are calling for a for action before year end to take advantage of this historically high exemption in advance of what could be next year, or certainly after the sunset of 2025, a lower exemption amount. What are your, what are your thoughts?

    Howard Vigderman:
    Well, first of all, I’m happy to say that this is an exercise that we’ve been through before. There was sort of, you know, the panic of 2010 and the panic of 2012 and all the State’s practitioners were telling their clients, you got to give away your money because, you know, exemption may go down, the exemption may change. The rate of the federal state tax rate can go up all those kinds of things. So we’re, we’re sort of used to addressing at the end of the year and a lot of times, so we don’t really know until the very end of the year, but we’re, we’re used to now addressing situations where clients will contemplate making large gifts in order to take advantage of a large exemption, which may very well go away. So as Jennifer said, the exemption now is $11,580,000 for a married couple it’s twice that, so for the very wealthy if they consider the possibility that the exemptions going to go down, as Jennifer mentioned to as low as 5 million, perhaps inflation adjusted they might want to make gifts to their children or other beneficiaries.

    Howard Vigderman:
    In order to take advantage of the exemption. The IRS issued regulations that state and of course, regulations could always change, but regulations that state that if you make a gift that consumes your full exemption, that government will not, when you die, go back and claw back the difference between the exemption at the time of the gift and whatever the exemption happens to be at the time that you die. So if you make a gift of, you know, $20 million in, in 2020, and at the time that the husband and wife died, the exemption is $10 million under this regulation that $10 million gift is not padded back in to the taxable estate and subject to federal state tax. We all hope of course, that that anti callback provision will continue to apply regardless of what the administration is. So for clients,uat that asset level and who were willing to part with dollars of that magnitude,uthey should consider funding trust for the benefit of their children.

    Howard Vigderman:
    Those trusts would be irrevocable trusts. They would have to be established and funded by the end of this year, if indeed the exemption is going to go down next year. Often the trusts are drafted so that the non-donor or spouse is an eligible beneficiary. Those trusts have been, come to be known as spousal access trusts because clients may be fearful that they’re giving away money, but they might regret it and they might want access to the money. So they allow the spouse access to the money. It’s very important that in creating trusts of that type, that you build in all kinds of flexibility to contemplate not only changes in the tax law, but also changes in the composition and what I’ll call sort of the behavior of your family. These trusts are generally generation skipping. They last not only for children and grandchildren, but for each successive generation of the donor’s family.

    Howard Vigderman:
    And one never knows what’s going to happen two and three and four generations for them. So it’s important to include provisions that anticipate the possibility of modifications to the trust, that address those kinds of changes. From a tax perspective, these kinds of trusts are also typically grantor trusts, meaning that the obligation to pay the income tax on the ordinary income and the capital gain income resides with the donor. So even though the donors parted with the money and it’s no longer part of their estate for estate and gift tax purposes they’re still responsible to pay the income tax. Now, intuitively that may sound like not a great deal, but in fact, from an estate planning perspective, it’s very powerful because by the donors paying the tax on the trust income over is in effect make a free gift to the children. So that is, is one of the more powerful aspects of this kind of trust.

    Howard Vigderman:
    If husband and wife are intending to each set up trusts in 2020, the safest thing to do is because there’s so little time not to include either spouses of beneficiary of the trust. If you would like to include a spouse, the safest approach is for the, what I’ll call the less wealthy spouse to be included in the trust created by the more wealthy spouse, but not to include the, the more wealthy spouses of beneficiary of the trust created by the less wealthy spouse. And the reason for that is the doctrines known as the step transaction doctrine and also the reciprocal trust doctrine doctrine that basically collapse a transaction that’s done within two short period of time of each other. So you need to be cautioned about that, but if you’re going to embark on one of these trusts, now’s the time to act.

    Howard Vigderman:
    More, more typical estate planning vehicles remain important. They even if the exemption is lowered these vehicles are important because they’re much more modest in nature, like the $15,000 annual exclusion gifts or 30,000 that a married couple to give to each of their beneficiaries paying children’s and grandchildren’s primary and secondary school, private education or college education paying for healthcare expenses directly. As long as those payments are made directly to the educational institution, the healthcare provider, the health insurer, they, they don’t even have to be reported on a gift tax return. They don’t cut into the $15,000 annual exclusion and they don’t use up any of the $11 million exemption.

    Paul Gaudio:
    That’s great. Can you, can you just throw a few words in her commentary about portability and the application of portability and in light of where we are today?

    Howard Vigderman:
    So portability Part of the law in 2010. And what it means is that the federal estate tax exemption that’s available to one spouse can be tacked on to the exemption of the other spouse. And that’s done by the estate of the first spouse to die filing a federal estate tax return, even if a return is not otherwise due and not electing out of portability. Okay. So in the past, since 2010, we have filed many federal estate tax returns for clients who don’t owe federal estate tax. And don’t have estates that are over the amount of the exemption merely to make the portability election. The IRS has been very generous in enabling us to file simplified versions of federal estate tax returns, merely to take advantage of the benefit of portability. So for, for practitioners and for clients working with practitioners, don’t sort of forget about portability on the death of the first spouse to die. I will say parenthetically that portability does not apply to all States that have an estate tax. And interestingly, it does not apply for generation skipping tax purposes. So the generation skipping tax exemption of the first spouse to die cannot be added onto the exemption of the surviving spouse that creates sort of a mismatch in drafting estate planning documents for clients who want to do generation skipping planning.

    Paul Gaudio:
    Thank you. I appreciate it. So the, the applicable federal rates there are synthetic rate use for a host of, of tax related matters. They are at all time historic lows. Can you talk about a little bit about the opportunities that those, that those rates provide?

    Howard Vigderman:
    So you’re, you’re absolutely right. The applicable federal rate, which I think has been around for 40 years is lower than it’s ever been. It’s in, in September and October of 2020, the rate that generally applies for estate planning purposes, which is a kind of iteration of the AFR is called the 75/20 rate it’s at 0.4%. Okay. Less than two years ago, it was as high as 3.4%. And then the not too recent future, it was five, six, seven percent. Not too recent past. It was five, six, seven percent. So 0.4% is very low. There are certain estate planning techniques that work extremely well when interest rates are low and a simple example would be lending money to children. So a parent or a grandparent can lend money to a child in exchange for a promissory note that there’s an interest rate that’s keyed in to the applicable federal rate.

    Howard Vigderman:
    So what I call the backflow to the parent, the interest rate is low. The child can take the funds that are loaned and use it to invest in a portfolio of stocks and bonds. And that achieves what a lot of good estate planning achieves, which is the asset, which is the promissory note in the hands of the senior generation as a frozen value. It’s frozen at the face amount of the note and the appreciation is in the hands of the junior generation. And that technique has the benefit of, you know, working nicely, but also being very simple as set up. It’s not going to take a water lawyer a lot of time to draft up a promissory note contrast that to that, but also a very powerful estate planning technique for the client who doesn’t want to part with huge amounts of money. As I was talking about earlier is a vehicle called the grantor retained annuity trust (GRAT) where the creator of the trust transfers securities or other property, which can include a business to what is typically a short term that is two or three year trust.

    Howard Vigderman:
    And they don’t or retains the right to a fixed dollar amount from the trust. The fixed dollar amount is an amount generally that’s sufficient for the value of the gift to the beneficiaries who receive the trust at the end of the two or three years for the value of that gift to be zero. So parent puts asset in trust for benefit for the parent’s benefit, receives a large annuity at the end of the two years, once left passes on to the children when interest rates are low, the value of the annuity is high, which means that you pay less to the parent in order to achieve the zero gift to the child. This works nicely because the parent is at least getting back something from the GRAT and the risk is with the government, essentially that the assets won’t appreciate and value at the 0.4% rate. Well, that’s pretty low risk to the parent and pretty high risk to the government.

    Howard Vigderman:
    So GRATs really work well in this kind of environment, where from time to time, the stock market does in fact go up in value. And I would recommend that to clients and this works very well when interest rates are low. If interest rates continue to be low in January and February, which they’re projected to be, even if the exemption goes down, this will still be a very powerful vehicle.

    Paul Gaudio:
    Thanks, Howard, low interest rate, high present value. Jen you know, charities are always finding it difficult to raise money. I would assume, you know with the COVID pandemic and everything that has transpired over the last six months, then it’s more difficult. The CARES Act had some provisions related to charitable. Can you give us a brief overview of what those were?

    Jen Marshall:
    I keep forgetting to unmute. That is the the pause there. So I’m, I’m happy to do that. Paul, so with the CARES Act some of what folks need to keep in mind for 2020 year end tax planning is there is a new $300 deduction available for those people that don’t benefit from itemizing because they don’t have deductions that exceed the standard, that higher standard deductions that are available. And something that, you know, has been unheard of that I don’t know, you know, that we will see again, is with a COVID introducing you know, having so much charitable need there that individuals are now allowed to deduct up to a hundred percent of your AGI. Now there are some stipulations to that. It does have to be contributions of cash contributions to donor advised funds or private foundations.

    Jen Marshall:
    Those do not qualify. So when you think about it it would be any cash contributions that previously were subject to 60% of your income. You now have the ability to deduct up to 100%. I would also note for any folks that have charitable carry overs, however that provision does not apply to the charitable carry over. So it would need to be a charitable cash charitable contributions that you’ve made to qualifying organizations in 2020. In addition there, there was some corporate changes to that allowed a cash contributions that were increased to 25% of income as well. So, you know, previously you know, when I mentioned Roth conversions being a powerful year end planning tool, I think that this plays into that as well, if you can marry those planning strategies in a way where you have lower taxable income and, you know, be able to capitalize on that, that opportunity for conversion.

    Jen Marshall:
    And that’s not necessarily something that will work for everyone. But there are also strategies, I think, from a charitable provision that we’ve been using for a couple of years now and, you know, definitely deserve consideration. And that would be, you know, once the itemized deduction or once the excuse me, standard deduction was increased to a much higher amount. There were many individuals that then no longer had the benefit of the itemized deductions that they had previously had. And to counter that you can, there are some planning strategies available where you can bunch, you know, charitable contributions together. You know, either at the beginning or, you know, end of the year to where you’re essentially making maybe two years worth of contributions. And there’s also, you know, the opportunity to make contributions into a donor advised fund where you get that deduction right away. But perhaps you didn’t want to make, you know, that some of a distribution or the contribution out to the charity. So the advised fund allows you to receive that deduction for that contribution, but it will allow it to stay there and grow. So you have some time to consider maybe the organization or the size of the gift down the road and not vehicle would provide for that for planning as well.

    Paul Gaudio:
    Thanks, Jen, appreciate it. Rachel, everybody’s been working from home for the last six, six months. I’m sure this must come up with, you know, do I get a, a home office deduction? And then of course, for people that work in, in one state and reside in another state, everybody’s, you know, curious about, do I have to pay city tax? Do I have to pay state income tax? What are the nexus issues that we should be looking out for?

    Rachel Kieser:
    Yeah, sure, sure. Paul yeah, I’ll start with the home office deduction and then kind of segue through Philadelphia and then into States. So right now and I just want to make it clear that employees are not eligible to claim the home office deduction. Previously they were unreimbursed employee expenses. So if they weren’t, if you didn’t get reimbursed by your employer you’re allowed to take them as a 2% miscellaneous itemized deduction, but those, that’s gone anyway. And even with that, it’s possible that what you’re using as a home office would not qualify as a home office because of the way you needed the criteria that are required. So with having said that if you have a business though and you’re using a portion of your home as a home office as possible, that you can take that deduction.

    Rachel Kieser:
    So the, in order to do that for your business, that the home office would need to be separately identifiable. So it can’t just be like a desk in a bedroom somewhere. It has to be like a totally separate room. You have to use it specifically for your business and nothing else. So you can’t have like a little play area for kids or whatever, like it has to be only for your business only for your business, and it has to be the principal place of business. So once you get past that step, the next step is to determine how much of an deduction you got. So there’s two ways to calculate it. There’s a simple simplified method, which is basically $5 per square foot for the square footage of the actual home office. That’s been in existence for maybe three or four years.

    Rachel Kieser:
    The regular method though is calculated based on the percentage of your, the square footage of the home office versus versus the total square footage of your home. You take that ratio multiplied by the expenses for your home. So utilities, real estate taxes, mortgage interest repairs et cetera. And then you can take that deduction as a whole home office. But again only applies if you have a business that you’re running, not if you are an employee. Philadelphia has come out with some guidance in the last few, I guess probably the last couple of months. So right now as we know, there’s a lot of skyscrapers in Philadelphia right now that are probably empty and the people I have been required to work at home because of that, Philadelphia came out with a a notice in about April that said, is there, if people are working at home outside of Philadelphia because of coronavirus they aren’t going to be subject to the Philadelphia wage tax as they normally would be.

    Rachel Kieser:
    So if you live outside of Philadelphia, but you work in Philly, you pay a lower percentage than Philadelphia residents. But now if you’re working at home because you’re forced to, because of COVID-19, you’re not subject to the wage tax. Having said that though, some employers may still be, they still might be withholding the Philly wage tax. So if that’s happening employees in that situation will be able to file a Philadelphia wage tax refund claim next year. And on that wage tax refund claim Philly has said that they will allow a home office deduction against the wage tax. But this is where, and this is if you’re an employee. So for federal tax purposes, if your employee, it won’t happen, it won’t be eligible. But if you are, if you’re in this certain situation with someone who lives outside of Philadelphia, but works in the city it’s possible that you can maybe get a deduction on that, on that end kind of segwaying into the residency issues,

    Rachel Kieser:
    There’s been a lot of talk about, you know, I, I work in Philly or in New York city. I don’t need to go to the office anymore. I’m just going to go move to Florida or I’m going to move to California or wherever I’m gonna move. So there’s, there’s a couple things that are going on here on the business side. If there are employees that are going to other States and working from there, it’s very important to know where those employees are, because you might have payroll tax issues for not withholding state payroll taxes there. And in addition, if you have employees in other States they, there could potentially be income tax nexus issues because the States cause claim that you have connection with that state just by having telecommuting employees there. That’s like one extreme. The other item in that is that if you have employees that normally would work in Philadelphia, but right now they’re working in New Jersey and you don’t even have an office or anything in New Jersey, they’re working over there because of coronavirus.

    Rachel Kieser:
    There are certain States that haven’t said what they would do. So New Jersey in this instance has said that they will not assert connection to New Jersey. If there people are telecommuting, just because of coronavirus, but, and California has done the same thing, but we don’t know if that’s going to be extended. And that could be an it’s going to be an ongoing issue because people are moving around a lot. And then the other thing to keep in mind for residency specifically is if you have a vacation home, shore home, mountain home if you’re a resident in one state, but that vacation home, is in another state that state may have statutory residency rules, which state many times it’s, if you have a place of abode in that state and you spend more than 183 days there, or basically a little bit over six months.

    Rachel Kieser:
    If you’re there 183 days, you’re actually considered a resident of that state as well. So say you’re a Pennsylvania resident, but you have a New Jersey shore home when you’ve been spending all summer there, they’re like, well, it’s nice to stay there in the fall too. If you start to get close to that 183 day mark be cognizant of that because New Jersey has a higher tax rate than Pennsylvania does. And you end up paying that higher rate. Same thing if you have a vacation home in New York as well, and neither of those States have come back and said, we’re gonna give some exception for coronavirus. I think maybe there could have been some, some kind of excuse earlier on, but I think they haven’t come out with guidance just because people are moving. They’re able to move a little bit easier now than in March, like the States aren’t locked down anymore. So that’s something to keep in mind for the rest of the year and it is by tax year.

    Paul Gaudio:
    Thanks. Thanks, Rachel. So we’re, we’re just about a quarter to four and we have a, we have a number of questions. Some were submitted in advance of the call and some have been submitted during the call. So let’s start with some of the Q&A what, if any tax changes apply to real estate transactions? Rachel, can you handle that?

    Rachel Kieser:
    Yes. so I think right now nothing has really changed through 2020 there was something in the CARES Act related to a fix of an error for, excuse me, qualified improvement property, where they allowed you to take a 15 year life on that. And also bonus depreciation. Under the tax cuts and jobs act, there was an issue where the way they drafted it, the only allowed it to be a 39 year property. So I think that’s the only thing that’s really impacting right now. So that actually is retroactive back to 2018 to fix the errors from one that TCJ law went into a fast moving forward though. It seems like the one proposal and the candidates platforms is that Biden has proposed to eliminate the section 1031, like kind exchanges for real estate.

    Rachel Kieser:
    So the tax cuts and jobs acts had eliminated them for all their property, but he’s proposing to get rid of them for real estate too. Just for some background, like kind of exchange what happens is or I’m going to sell this investment property and I’m going to replace it with a new property. Then it’s 45 days. So I’m going to sell this and then I’m going to defer my gain and not pay tax on that gain this year. I’m actually going to buy the replacement property. And what happens is you reduce your basis in that investment property. So basically you’re deferring your gain that you had on the first property until you sell the replacement property. And you can actually keep doing 1031 exchanges on properties like one after another. So Biden is proposing, removing that provision.

    Paul Gaudio:
    Thanks. Thank you, Howard. I have a question about IRA distributions when I reach age 70 and must start using my IRA. My IRA, can I do so monthly without penalty?

    Howard Vigderman:
    Well, under the Secure act, which became effective January 1st of this year, the age, which hadn’t been 70 and a half is now 72. So you get a little bit of a deferral of that. There are however, no penalties on withdrawals from IRAs beginning at age 59 and a half. So in sort of specific answer to the question, it’s not, it’s not a penalty. You have to worry about beginning in a way back to age 59 and a half, but there is of course the income tax that you have to pay on distributions no matter when you make them clients who were able to will for both IRAs and any kind of qualified plan, like a 401k or 403b. Now the defer payments until they’re 72.

    Paul Gaudio:
    Great, thank you. I have a, another question: 2020, what is the standard deduction? So I’ll take that one depending on your filing status. If it’s a married filing jointly, that’s about $24,800. If you’re single, it’s about 12,400, if you’re a home care for a dependent it’s about 18,500, and of course there’s additional there’s additional exemptions for, for age 65 and over in, in blind. Another question comes up about, have rules on itemized deductions changed. Jen, can you take that one?

    Jen Marshall:
    Yeah, I can take that one. So when we’re talking about itemized deductions, I had briefly mentioned the ability to deduct up to 100 percentum for cash distributions. And then if you are a beneficiary of a terminating trust or estate, the IRS did come out and provide guidance when they eliminated the miscellaneous itemized deductions, that was not clear because when you have excess deductions that are passed through to you on a K-1, when that terminates, it had been a miscellaneous itemized deduction. So I would caution folks that if you do see that that is something that we’ve, you know, received definitive guidance on. But I can also touch base on the presidential election positions for the itemized deductions as well. The platform for Biden has really been to reintroduce the limitations on the deduction for itemized deductions that had previously been in place and was done away with under the tax cuts and jobs act that Trump introduced and Biden is also calling to eliminate the $10,000 limitation that is currently in place for the state and local income taxes, which has been an extremely hot topic for folks. And I know I, you know, I have looked and researched too, to try to assist in providing guidance on the various tax state tax credits, you know, that, that were introduced to kind of hedge the cut of, or, you know, the sting of losing those for those clients that are in the higher tax states, especially folks that are in like New York and New Jersey. So that’s always something to be very mindful of.

    Paul Gaudio:
    Thank you. There was a question that had come in about refinancing. I’m assuming this is home refinancing. The question is, are there any tax ramifications to refinancing in pulling cash out in an amount which exceeds your cost basis? Rachel, can I defer to you on this?

    Rachel Kieser:
    Sure. I don’t think so, because you’re going to pay it back. You’re just taking a loan out in excess of your in an excess of your basis. So you’re still, you’re gonna pay it back. At first I read that as if it was a, some kind of real estate property in refinancing it and distribution from a partnership, but that would be different. Not that I can think of. It seems like you would pay it back. So it is just, It is just I think maybe you’d have to reduce your basis cause you’re taking like a distribution against the [unknown].

    Paul Gaudio:
    The presumably though the, the interest deduction couldn’t, couldn’t be taken on the whole balance, right. Meaning if you bought a house for 200,000, $200,000 and it was wholly financed, 20 years later, it’s a zero balance. And then now it’s a million dollars and you take a loan for 500 with no deductability depending on the flow of the money. Right,

    Rachel Kieser:
    Right. But I think art, when you still be limited to the $750,000, like if you, if you don’t have any basis in the property, I don’t know. I think that you might be still be able to take the deduction.

    Paul Gaudio:
    I always thought the more, the more the, the, the interest deduction had to be for purchase acquisition or, or improvement by the real estate. But yeah, I guess, you know, depending on all the different circumstances, there’s another question. Let’s see. It was about the earned income tax credit. Jen, can you take that? What are your thoughts on the earned income tax credit?

    Rachel Kieser:
    I think we lost Jen. I can answer that question. So the EITC are the blocks. It’s a good strategy. If you’re already charitably inclined for Pennsylvania, what they do is they’ll like, what is Pennsylvania? So they’ll give you a 90% credit for the amount that you donate. So a lot of people will do this to maybe their child’s school that they’re already donating money to every year. So say you have your child to school and you’re already donating $10,000 each year. I believe there was like a two year commitment. You don’t have to do 10,000. I’ve had clients do like five. So what they do is they’ll, you, you transferred, you become an LLC member in this partnership, you transfer $10,000 to the partnership and Pennsylvania will give you a 90% credit for those dollar, for dollar-for-dollar, but 90% of that, so you would put a $9,000 credit against your Pennsylvania tax.

    Rachel Kieser:
    And then for federal purposes, you’ll still get a charitable contribution deduction of a thousand dollars in years past, they go, you can actually still take a federal deduction of the full 10. So you kind of even, almost make money on the deal. Now they, now they came out with a notice in the last couple of years that you you’ll only get a difference between the 10 and the state tax deduction. But if you’re already charitably inclined, it’s almost like you’re kind of directing your tax dollars from the state to the specific organization that you want to get those funds because you’re going to be paying the tax anyway. But it is also important to watch that you only do as much as what your state tax liability would be because the care, the credits don’t carry over to the next year. So if you do too much, you’re, you’re spending more than you would on your Pennsylvania tax prep, Pennsylvania tax without the credit.

    Paul Gaudio:
    Thank you. I think we have what, the time for one more question, Howard, it’s, it’s directed to you is income received from my aunt’s estate over $5,000 taxable and should be listed on my tax return?

    Howard Vigderman:
    Well, I’m assuming that the question’s referring to a situation where the beneficiary of the aunt’s state received the K-1 and the K-1 reflects the portion of the income from the estate that’s taxable to the beneficiary. To be clear and to use a simple example, if an estate has $99 of income and it distributes those $99 a month, three beneficiaries, each of them will get a K one for $33. So the example in the question of the K-1 being $5,000, yes, that is required to be reported on the 1040 of the beneficiary. And often there’s also a state K-1, and that would be, that could be reported on the the state return of the individual, depending on what state they live in.

    Paul Gaudio:
    Thank you. I realized there was a lot of questions submitted. We have contact information, if questions about anything on our presentation today, come up, please feel free to email me. My contact information was contained in the original invitation. So in closing, you know, for, for our clients on the call, we appreciate you and thank you for your business. For those on the call that are not clients Bryn Mawr Trust, we appreciate your loyalty to your current providers and hope that in the future, if there is ever an opportunity for us to play a role in your financial life, that you will reach out. I want to thank Rachel, Howard, and Jen for their, for their great knowledge and insight, appreciate their time. We covered, as I said, a wide range of topics. If questions, surface regarding anything, please feel free to reach out. Thanks for your participation. Have a great day, everyone.

    Closing:
    This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at bmt dot com forward slash wealth. The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all States. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.

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