Tax shifts help, hurt depending on income

Before you start reading, I need you to do a quick check of your finances. Are you middle class or below? Doing pretty well but not professional athlete level? Stinking rich? No rush, take your time. Check with a spouse if necessary. Got it now?

Great. Now we can start. Let’s say you are stinking rich. The new year brings a pleasant surprise for you. The inflation adjustment to the estate and gift tax laws means you can now give another $180,000 to your heirs free of any gift or estate tax.

That’s $11,580,000 instead of $11,400,000. Your reward for living one more year. Keep up the good health and the numbers will keep rising. Congratulations to the kids!

For those of you doing pretty well, ignore the above. You weren’t subject to the estate tax anyway. You do pay Social Security taxes. And now you’ll be paying more because the wage limit for the old-age part of the tax went up by $4,800.

So that’s $298 more per year for you. Same for your employer. If you’re self-employed that’s all on you. Both halves. But someday you’ll get it all back with interest. Just kidding!

Almost forgot you other people. You may actually be better off because of inflation adjustments. Your standard deduction just went up $400. Double that if you’re married! That’s free deductions for you if you don’t itemize.

All of you come together for this one. Beginning in 2020, you don’t have to start taking distributions from retirement plans until the year that you turn 72. That’s up from 70.5.

Practically speaking, it’s only 5-year-olds who tell you they are 5½. People who are 70 rarely add the half. The old rule made you get uncomfortably specific about your age when you got close to the magic number. Now it’s a whole number.

I suppose they skipped past 71 so we wouldn’t have a prime number for the starting point. Well, no matter. If you did turn 70.5 in 2019, you lose. The distributions still have to start for the 2019 year.

If you turn 70.5 in 2020, wait for it, nothing happens! Your distributions don’t start until the 2021 year. In fact, no one who was not 70.5 by Dec. 31, 2019, will have 2020 as their starting year. That makes 2020 the year that time forgot.

Wake the kids, wake the neighbors! OK, hold off on that, this is not quite as exciting as it first appears. Turns out that 80% of all people take more than the required minimum distribution from their retirement plans. Seems they need the money for, I don’t know, food.

Some income maybe does matter. The age 72 thing, while admittedly not a prime number, is a good thing for those who are well-to-do enough that they don’t need those retirement plan distributions yet.

Final point — the IRS has (again) changed the tax forms. Seems that some people were beginning to understand their returns. Well, no more of that! So wait by the printer as it spits out your return and once again ask, is this the way it’s supposed to look? Let’s hope the people who did the software know what they are doing.

Q: I made a gift in 2015 that should have been reported on a gift tax return and I never filed. No tax was due but should I now file the form?

I think you should. Others may disagree. But the return was required, and there is no reason to not catch up now. It will probably never make any difference in your gift or estate tax liability, but at least you’ll be in compliance with the law.

There is no penalty for a delinquent gift tax return if no tax was owed. The income tax has a minimum penalty for a late filing ($205) but that applies only to “Chapter 1” taxes, which in tax law speak means sections 1 through 1400Z (yes there is a Z).

Estate and gift taxes are an entirely different subtitle of the tax law which doesn’t begin until Chapter 11. No Chapter 1 tax, no minimum penalty. So just file now and be done with it.