Tax Update Fall 2020 Considerations

November 21, 2020Evergreen Q4 2020, News

Woodstock Quarterly Newsletter Update

The taxability of social security benefits
Will the Tax Bite Ease?

The day-to-day quest to lower the bite of taxes continues. Examination rates for the IRS now defy logic. For all individual returns the examination rate for tax year 2018 was 0.15 percent.[1]  For income over $100,000, progressing by categories to income over $10 million, the examination rate varied from 0.05% to 0.03% annually. This is where the money is. For incomes of zero, yes, that’s right, zero, the examination rate was 0.31 percent. Fraud, particularly regarding the earned income tax credit (EITC), causes the focus. Using the tax code for social engineering rather than collecting money does skew the system. Some other things require attention, but don’t get it.The taxability of social security benefits, meaning “the percentage of social security benefits received that were included in taxpayers’ adjusted gross income,” rose from 21% in 1992 to 48% in 2017.[2]  When paid into the social security “trust fund,” an individual’s payments were not deductible. The income tax was calculated on income before social security payments, everyone’s W-2, box 1. Now to tax that portion of the “benefits” again defies more logic. It’s just an easy target.

Tax Season Surprises?

What will be the biggest surprise this tax season?  According to the National Taxpayer Advocate Objectives Report to Congress for Fiscal Year 2021, key points for improvement are updating hardware and software, modernization of technology, use of digital communications, and electronic production of documents in a secure environment.[3]  The IRS is now behind the times electronically. Coming into the train tunnel at the other end are stimulus checks received, which, as you may remember, are merely advance payments of a 2020 refund due to be paid, if earned, in 2021.[4]  If not earned, what happens?  Give it back! Adding to the potential mess are the executive order for payroll tax cuts and the confusion around teleworking both for employees (“domicile”) and for companies (“nexus”) (see QMP Summer 2020).

Qualified Charitable Distributions

Even though required minimum distributions have been suspended under the SECURE Act for IRA owners over 70½, a qualified charitable distribution (QCD) can still be made for 2020. Because of the larger standard deduction now available, “if clients are giving to charity anyway and they qualify for QCDs, then this is the way they should be giving.”[5]  Because a QCD from an IRA is not included in the income of the taxpayer, then adjusted gross income (AGI) is not inflated by the gift. Because AGI determines the “availability of tax deductions, tax credits and other benefits,” such as the taxability of social security benefits and the surcharges for Medicare, this is an important benefit. These gifts must be made before year-end.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager

[1] Journal of Accountancy, October 2020.
[2] Journal of Accountancy, August 2020.
[3] Journal of Accountancy October 2020 and
[4] WSJ, 9/29/20.
[5] Financial Advisor Magazine, October 2020.