Updated: HCR Wealth Advisors and the Art of Helping "Smartly"

Updated: 6/3/20

Filing 2019 taxes during a pandemic

Filing taxes isn’t something most people look forward to. In fact, most people dread it. Then add the chaos of spending months at-home in lock-down and the uncertainty in virtually every aspect of life. It’s a lot.

For some, the dread comes from not wanting to revisit a full year of financial transactions that bear witness to poor spending choices and lost opportunities. For others, it comes from holding your breath while you calculate if enough was withheld, or if you’ll have to find more money to send to Uncle Sam.

So far, in this article, we’ve spoken about how to gift ‘smartly’ in these troubled times. What you give this year will only be reported in your 2020 tax filing due in 2021. But, anyone who is helping others in 2020 – whether giving to individuals or charities – more than likely also did so in 2019. So, let’s look at how that generosity affects your 2019 tax filings.

Which gifting transactions only have to be reported? If, in 2019, you didn’t give any individual (other than your spouse) more than $15,000 – or $30,000 as a couple – you won’t have to report those transactions. There’s no tax implication for either the giver or the receiver. If you do exceed those amounts, you will have to report them to the IRS. You will file a gift tax return known as “Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.”

While you won’t have to pay taxes on the transactions, they are recorded and accumulated over your lifetime. When you die, everything you gifted in excess while alive will be subtracted from the $11.58 million “lifetime gift tax exemption” that you can leave your heirs tax-free. (The exemption figure goes up and down with different administrations.) Lifetime gifting may be part of an astute estate strategy that an advisory group like HCR Wealth Advisors would devise.

Which gifting transactions have possible tax implications? Fewer people itemize their deductions today because the Tax Cuts and Jobs Act of 2017 increased the standard deduction so much. However, if you do itemize your deductions, you may deduct charitable contributions of money or property (at fair market value) made to qualified organizations according to section 170(c) of the Internal Revenue Code. You would itemize those deductions on “Schedule A (Form 1040 or 1040-SR), Itemized Deductions.”

All contributions must have been made during the calendar year covered in your tax return.
For some organizations, you are limited to deducting 50% or less of your adjusted gross income (not including net operating loss carrybacks). For others, you are limited to 30%. Your financial advisor or tax preparer can clarify that for you.

In itemizing, you would have to differentiate between cash and non-cash contributions. For cash, how you substantiate the gift varies depending on whether the amount was under or over $250. For non-cash, the requirements for substantiation increase in complexity as the value of the contribution increases: under $250, $250 to $500, $500 to $5,000, $5,000 to $500,000, or over $500,000. Anything over $500 requires a “Form 8283, Noncash Charitable Contributions.”

One other form of charitable giving that requires reporting to the IRS would be if you set up a qualified charitable distribution (QCD), most likely with the help of a financial advisor such as HCR Wealth Advisors. Funds are taken from your IRA and placed directly in a QCD for subsequent payment to a qualified charity. The contribution fulfills part or all of the required withdrawal, or Required Minimum Distributions (RMDs), for the year.

While not an actual deduction, it does mean you don’t have to declare the withdrawn funds as income and pay tax accordingly. Such transactions are reported on “Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans.”

Deductions for QCDs can be an essential part of your tax strategy. You will want to integrate them into your overall financial planning and could benefit from a team of experts such as those at HCR Wealth Advisors.

The CARES Act’s tax filing extension: When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, as part of its emergency relief plan, the Treasury Department and the IRS extended the deadline to file returns and pay taxes for individuals and businesses.

Any such deadlines are usually set for April 15, 2020, were extended automatically to July 15, 2020. No need to file any forms or make any calls to qualify. And, individuals, trusts, estates, corporations, and other non-corporate tax filers are affected.

Deadlines for any reporting or filing related to gifts are part of the extension. You may have more time to obtain documents that substantiate deductions, for example, but the extension does not change the fact that the gifting had to occur in 2019.

If you are expecting a refund for the 2019 tax year, there is no need to wait until July 15. The IRS suggests you file as quickly as possible, as it is processing returns and issuing refunds on a rolling basis.

Does the extension apply to state tax returns? The relief provided by the CARES Act applies only to federal income returns and tax payments (including the tax on self-employment income). It does not extend to state tax payments or deposits, or any other types of federal taxes.

If your state collects state income taxes, you will still have to file those returns. Deadlines may be different from those for federal taxes, and some states may have extended filing and payment deadlines. You want to check your state tax agencies to know for sure.

What if you need more deductions? Because the filing deadline for federal returns has been postponed, the contribution deadlines for Individual Retirement Accounts (IRAs) or Health Savings Accounts (HSAs) have also been moved to July 15. So, if after calculating your tax burden, you’re looking for some additional deductions, check whether you maxed out your possible contributions to IRAs or HSAs. As long as you qualify in terms of income limits and contribution limits, you still have time.

Even if you don’t have an IRA account, you can still open one this year (before the July 15 deadline) and fund it. Financial advisors such as HCR Wealth Advisors can help you do this. Be sure to indicate “previous-year contribution” when you make your contribution, so you don’t contribute to the wrong year (2020 instead of 2019). For HSAs, you need a high-deductible health plan to qualify.

And what if you still need more time? If the pandemic, its repercussions, or the recent events around the country have made it difficult to pull all your paperwork together, request a filing extension beyond July 15 by filing “Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” You won’t need to justify your request and your filing obligation will be moved to October.

You don’t want to take a chance of missing your filing deadline, as the IRS can apply a failure-to-file penalty. If you extend and don’t need the extension, it doesn’t mean you have to wait to file. It just means that you can.

One critical detail: The extension gives you more time to complete your return, but it does not exempt you from having to make a timely tax payment. The IRS wants to be paid. So, even if you need the time to complete your calculations, estimate your tax bill and pay it by the revised tax date: July 15. If you don’t, you’ll be subject to the IRS’s failure-to-pay penalties.

Helping Smartly

As more and more companies are forced to let employees go – and as more shut-down businesses struggle with bills and bankruptcy – friends and family less affected by the coronavirus crisis will want to lend a helping hand. The question is: how do you do that, smartly and in accordance with tax law? HCR Wealth Advisors can help.

While many will simply open a checkbook, it makes sense to ask if there are tax implications before doing anything. And to look at that topic, we need to separate contributions to individuals and to charities. First and foremost, speak to a financial advisor like Los Angeles-based HCR Wealth Advisors if you need some expert direction. If not, we’ll look at normal circumstances for charitable contributions and then take a look under today’s pandemic circumstances.

Contributions to individuals

In the case of individuals, our concern might be a gift tax. When it comes to helping out friends and family, we often hear a concern about whether the amount we give would fall within the IRS’s annual exclusion.

How do annual exclusions work, and do they matter? In 2020, the annual gift tax exclusion is $15,000 per person. You can give that much to as many people as you want in any calendar year and you do not need to report to the IRS. As a couple, you are each entitled to the annual exclusion amount on the gift, so together you can give each recipient $30,000.

What if you exceed the annual exclusion? You can exceed the $15,000 per-person limit and the recipient won’t have to pay taxes. However, you will have to report the per-person excess to the IRS when you file for the year. Still, no gift taxes are paid.

Those excesses are accumulated over your lifetime and subtracted from your available ‘lifetime gift tax exemption,’ which in 2020 equals $11.58 million. So, all contributions over $15,000 per recipient per year will be tax-free until you reach this amount and when you die, the amount you gifted while alive will be subtracted from the amount of your estate that you can leave tax-free. (Coincidentally, that amount is also $11.58 million in 2020, but it does change with different administrations).

So, with very few exceptions, no gift tax is paid by the giver or the receiver when contributing to individuals. Again, the financial experts at HCR Wealth Advisors are an invaluable resource on this topic.

What exactly is a gift? A gift is any transfer of value made to an individual, whether directly or indirectly, where equal value is not received in return.

Are there any exclusions? The following exclusions have no tax implications whatsoever:

• Gifts that don’t exceed the annual exclusion per calendar year.
• Gifts to your spouse.
• Gifts to a political organization for its use.
• Tuition or medical expenses you pay for someone else (called the educational and medical exclusions).

Gifts to qualifying charities are also exclusions and will be discussed separately because of their deductibility from your tax burden.

May I deduct gifts on my income tax return? No, you cannot deduct the value of gifts you give unless they are deductible charitable contributions.

Contributions to qualified charities

Americans are, by nature, some of the most generous ‘givers’ among developed countries and their response is no different when it comes to the consequences of the corona pandemic.

Those who regularly contribute to their favorite charities or projects may be motivated to contribute more. Those who don’t usually contribute are keenly aware of the increased need as everyone tries to figure out how to function in a shut-down economy.

Contributors are not just prominent philanthropists. In fact, a recent LA Times article describes the giving as “Small checks to food pantries, foundations issuing emergency grants to desperate nonprofits and, most conspicuously, billionaires doling out big-dollar gifts.”

The generosity is said to be “taking place at the community level by everyday people and sometimes really heroic acts where people are stepping up to help their neighbors.”

So, are there tax benefits linked to contributing to organizations? Yes, you may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions.

How do you define a qualified organization? A qualified organization is one that falls under section 170(c) of the Internal Revenue Code. These include, among others:

• A trust, fund, or foundation organized and operated exclusively for charitable, religious, education, scientific, or literary purposes, or for the prevention of cruelty to children or animals.
• A church, synagogue, or other religious organization.
• A war veterans’ organization or related entity.
• A nonprofit volunteer fire company.
• A civil defense organization.
• A domestic fraternal society, for charitable uses only.
• A nonprofit cemetery company for general perpetual care.

You cannot deduct contributions made to foreign organizations and you will want to check the IRS’s Tax Exempt Organization Search tool if tax deductibility is vital to you.

When can you contribute? Contributions must be made before the close of the tax year in which you want to take the deduction. If you are contributing property, you would use the ‘fair market value’ of the property and follow the IRS’s rules to determine that value.

Are there limitations on deductions? Yes. For most organizations, you can deduct up to 50 percent of your adjusted gross income not including net operating loss carrybacks. For some private foundations, veterans’ organizations, fraternal societies, and cemetery organizations, contributions are limited to 30 percent of your adjusted gross income.

How else can I benefit from making donations? If you are over 72 years old and are required to make annual Required Minimum Distributions (RMDs) from your IRAs, you can set up a qualified charitable distribution (QCD). Funds you take from your IRA and place in a QCD – for subsequent payment directly to a qualified charity – count towards your required RMDs for the year. However, you don’t pay tax on those withdrawn funds as you usually would on RMDs. (Check with your financial advisor on how to set up a QCD.)

Then, along comes the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed on March 27, 2020.

How the CARES Act affects gifts and donations

The Tax Cuts and Jobs Act of 2017 nearly doubled everyone’s standard deduction when filing for taxes. Since then, as an individual, you now need over $12,400 in approved deductions to justify giving up the standard deduction. As a joint-filing couple, you would need $24,800. As a result, the number of people claiming itemized deductions has dropped sharply And, to be able to deduct charitable contributions, you have to itemize so the number of charitable donations by individuals also dropped significantly.

But, with the corona crisis, we are going to need help from food pantries, churches, and other charitable organizations and Americans are givers. So, the recent CARES Act, or stimulus bill, introduced some changes.

If you take the standard deduction on your 2020 tax return (filed in 2021), you can deduct up to a $300 cash deduction made to a charity. It is called an ‘above-the-line’ deduction because you subtract it from your income, along with your standard deduction. The impact on your bank account won’t be significant: maybe $30 if you’re in the 10% tax bracket. Or $111 in the 37% bracket. Speak to your financial advisor for a clear look into your individual circumstance.

If you itemize on Schedule A of your 2020 tax return, you can claim your charitable contributions to qualified organizations as a deduction. For 2020, the CARES Act suspends the limitation of deducting only up to 50-percent of your adjusted gross income. However, the limit for all charitable contributions remains at 100% of AGI.

Other CARES Act advantages: The Act suspends the requirement that those over age 72 make RMD withdrawals from their IRAs in 2020. It also waives the 10-percent early withdrawal penalty on up to $100,000 of distributions from IRAs if you are below age 59½. Also, you can spread the tax on income attributable to IRA distributions over three years, and you can recontribute the funds back into the account within three years to avoid taxes altogether.

In summary, they say it is better to give than to receive. If you want to give, however, at least it’s nice to know you won’t be penalized for giving to individuals and that you may even benefit on your taxes when contributing to qualified charities.

If you have any questions, be sure to reach out to your financial advisor to avoid any potential federal estate tax issues.

About HCR Wealth Advisors:

HCR Wealth Advisors is a team of established, collaborative financial veterans who report to only one person: you. With decades of cumulative experience, everyone at HCR Wealth Advisors is guided by a commitment to protect your self-interest, grow your wealth, and help achieve financial peace of mind. HCR Wealth Advisors was founded in 1988 and is located in Los Angeles, California.

This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this website.