Succeeding in Your Business: Tax time is approaching; let's review 2020's new laws

Each year brings new changes to our Byzantine tax system, and 2020 is no different, with recent federal and state laws making the tax landscape more challenging than ever for small businesses and their owners.

Here are some tax law changes you need to be aware of in 2020:

Required Minimum Distributions from Retirement Plans. Probably the biggest federal tax law change last year was the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, which Congress passed in late December. If you turn 70 1/2 after 2019, you can now wait until you’re age 72 to start making mandated annual withdrawals from your retirement accounts. If you turned 70 1/2 on or before Dec. 31, 2019, you are still required to take those mandated annual withdrawals now.

For anyone who inherited an IRA from an original IRA owner who passed away prior to Jan. 1, 2020, no changes to your current distribution schedule are required. However, for situations where the original IRA account owner passes away after Dec. 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual and beneficiaries who are less than 10 years younger than the decedent.

Rolling Your Traditional or SEP-IRA into a Roth IRA. If you are worried about required minimum distributions or if you want to pass your IRA or SEP-IRA on to your heirs free from the 10-year pay-down requirement, you should talk to your accountant about converting your IRA into a Roth IRA this year. You will have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax, and the decrease in tax rates that became effective in 2019 makes such a conversion less costly than it would have been in previous years. Of course, this option only makes sense if the tax rates when the money is withdrawn from the Roth IRA are anticipated to be higher than the tax rates when the traditional IRA is converted — a virtual certainty if the Democrats retake Congress in this year’s election.

Home Office Deduction. When the Tax Cuts and Jobs Act of 2017 eliminated the miscellaneous itemized expense deduction, it eliminated the ability of employees to deduct home office expenses. However, taxpayers with their own business can still file a Schedule C and take a home-office expense deduction if part of the home is used for that business. State income taxes, property taxes and home mortgage interest allocable to your business can also be deducted. Such deductions are not subject to the limitations that apply to individual taxpayers who do not operate a Schedule C business from their home.

Estate and Gift Tax Exemptions. The exemption from federal estate and gift taxes increases to $11.58 million in 2020 when the annual inflation adjustment is taken into account. Amounts over the exemption levels that do not qualify for either the marital or charitable deduction are taxed at a flat rate of 40 percent at the federal level. Because the gift and estate tax exemption have been unified since 2011, this exemption can be used during lifetime or at death or some combination of both.

Keep in mind that the 2017 tax that implemented the new exemption amounts is only in effect through 2025. Beginning Jan. 1, 2026, these exemptions will revert to their pre-2018 levels ($5 million indexed for inflation) unless further legislative action makes the changes permanent. With the 2020 elections on the horizon, there is always the possibility of a new tax law, which could result in a more rapid return to pre-2018 levels and perhaps even lower exemptions. For this reason, you should discuss with your accountant or tax advisor gifting strategies that can be implemented now to reduce the value of your taxable estate.

Mansion Taxes. A growing number of states are adopting taxes on sales of high-end real property, known as “mansion taxes,” beginning in 2020. Effective July 1, 2020, Connecticut will impose an additional 2.25 percent tax on real estate taxes in excess of $2.5 million, while New York has adopted a progressive mansion tax with a top tax rate of 3.9 percent on properties purchased for $25 million or more.

I am grateful as always to my tax-savvy CPA friends John D’Aquila (john@daquilallp.com), Margaret (Peg) O’Donnell (mytopstonecpa@optonline.net), Russell Abrahms (russ@rlabrahmscpa.com), and financial advisor Julie Jason (readers@juliejason.com) for their input and support of this column.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”

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