The coronavirus disease 2019 or COVID-19 has gravely affected the majority of the population. If they didn’t get ill with the virus, they suffered financially from the effects of the disease. Quarantine orders were made, which forced people to work from home. Some companies had to shut down while others had to cut down employees.
The year has been a terrible one and there are no indications that the negative effects are about to end. This is why people have to be smart about their taxes.
There is one thing that people can take advantage of: federal give and estate tax exemption. Through the Tax Cuts and Jobs Act of 2017, this exemption has been doubled temporarily until 2025.
When calculated, the exemption permits a taxpayer to transfer up to $11.58 million that will be free of federal gift or estate tax. For married couples, the amount can be doubled. That’s $23.16 million that will not be taxed.
What taxpayers can do
For people who have properties, this is a great opportunity to present family members with some of their assets before the provision will be dropped to the previous level of $5 million by Jan. 1, 2026. For couples, the amount will be $10 million.
This was not a very popular strategy before because wealthy people fear possible clawback. The fear was not unfounded. There was indeed a risk that a part of the pre-2026 gifts will be under clawback and will be subjected to estate taxes if the exemption amount is lower at the time of the taxpayer’s death.
However, the Internal Revenue Service (IRS) clarified that this will not happen. A November 2019 set of regulations carried the clear interpretation.
Cost segregation study
Of course, there are other strategies to keep in mind aside. For taxpayers with real estate used for commercial purposes, the cost segregation study is always a practical system.
This will allow taxpayers to consider other assets as separate entities for taxing purposes. The purpose of this is to have segregated assets be depreciated much quicker than the real estate. This means that one’s tax due will be greatly reduced. As a result, cash flow will increase.
Coupled with bonus depreciation, the cost segregation study will really help people out during this economically difficult time. The bonus depreciation allows taxpayers to immediately deduct 100% of the cost of qualifying assets that were started to be accounted for between Sept. 28, 2017 and Dec. 31, 2022.
Bonus depreciation will be phased out over four years starting in 2023.
Taxpayers need to be meticulous about their filing to ensure that there will be no red flags raised from their tax return. The chance of being audited by the IRS isn’t that high. In 2019, for example, the figure was less than 0.50%.
Still, it’s better when a taxpayer is prepared for eventualities. Among those that can be considered red flags are the higher-than-normal deductions, claim for significant losses, and the claim of 100% business use of vehicle, among others.