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When considering how to manage the property and/or well-being of a person under a disability, the need to be appointed a guardian for that person often becomes part of the conversation.

In New York State there are three types of guardianship proceedings whereby a guardian can be appointed. The three guardianship proceedings are as follows:

Although each type of guardianship proceeding is authorized by its own law, all three allow for the appointment of a guardian of the person only, a guardian of the property only, or the guardian of the person and property.

Since they are all authorized and guided by separate laws, the process by which a guardian is appointed in each of the types of guardianships will be different.

This blog post will focus on how to become a Guardian for an Incapacitated Adult in an MHL Article 81 guardianship proceeding.

MHL Article 81 Guardianship Proceeding

An MHL Article 81 guardianship proceeding is typically commenced on behalf of adults who are unable to care for themselves and generally involve an incapacitated person who was once able to manage his/her own affairs but lost the capacity to do so later in adulthood. The loss of capacity could be because of a chronic illness like Alzheimer’s Disease, or a traumatic event like a stroke.

The person who is the subject of the guardianship proceeding is called an “Alleged Incapacitated Person”, or AIP for short. The proceeding can be commenced by the AIP or an interested party as described under section 81.06 of the New York Mental Hygiene Law. The person who is commencing the proceeding is known as the Petitioner.

To commence a proceeding to appoint an Article 81 guardian for the personal needs and/or property management of the AIP, the Petitioner must prepare a number of legal documents with the court, such as a Petition to Appoint a Guardian, a proposed Order to Show Cause, a Request for Judicial Intervention, and a Notice of Proceeding. Once the documents are prepared and executed accordingly, the Petitioner must file these documents with the Supreme Court of the county in which the AIP resides or is physically present.

Order to Show Cause

The court will then issue the Order to Show Cause, which name the appointed a Court Evaluator, possibly an attorney for the AIP, set the service requirements, and schedule a hearing date for the guardianship proceeding. The Petitioner must then serve the court appointees, the AIP, and the interested parties with the Order to Show Cause and/or Petition according to the terms set out in the Order to Show Cause.

The Court Evaluator will then need to conduct a thorough investigation of the facts and circumstances of the case, which includes meeting with the AIP, interviewing the Petitioner and other interested parties, and reviewing the AIP’s financial and possibly medical records. The Court Evaluator will then issue a written report for the court and testify at the hearing.

At the hearing, the Petitioner and any nominated guardians or standby guardians will need to testify. The Petitioner has the burden of proving that the guardianship is necessary and that the person is incapacitated, and should have witnesses who can testify as to any observations they may have made that can speak to the AIP’s lack of capacity.

The AIP, or through counsel, can cross examine the Petitioner, any nominated guardian, or witnesses that testify, and can either testify himself/herself, or call his/her own witnesses. At the end of the hearing, the judge will render a decision on the record.

If the Petitioner is successful in the proceeding, she will then need to submit a proposed Order and Judgement along with the transcript from the hearing to the court and provide a notice of settlement to the interest parties. Once the Order and Judgment is issued by the court the Petitioner will then need to sign a Consent and a Designation form, and file it along with a copy of the Order and Judgment with the County Clerk’s office. If the court is appointing a guardian for the Property Management of the AIP, then a bond may need to be issued and approved by the court and then filed with the County Clerk’s office as well.

Once the County Clerk issues the Commission the Guardian will have qualified to serve and can begin acting as Guardian pursuant to powers and directives listed in the Order and Judgment.

When considering how to manage the property and/or well-being of a person under a disability, the need to be appointed a guardian for that person often becomes part of the conversation.

In New York State there are three types of guardianship proceedings whereby a guardian can be appointed. The three guardianship proceedings are as follows:

  • Surrogate’s Court Procedure Act (SCPA) Article 17 – Guardianship of a Minor Child
  • SCPA Article 17-A – Guardianship of an Adult with Developmental and/or Intellectual Disabilities
  • Mental Hygiene Law Article 81 – Guardianship of an Incapacitated Adult

Although each type of guardianship proceeding is authorized by its own law, all three allow for the appointment of a guardian of the person only, a guardian of the property only, or the guardian of the person and property.

Since they are all authorized and guided by separate laws, the process by which a guardian is appointed in each of the types of guardianships will be different.

This blog post will focus on how to become a guardian of an Adult with Developmental and/or Intellectual Disabilities in a SCPA Article 17-A guardianship proceeding.

In New York State, when a person becomes 18 years-old that person is considered legally competent to make decisions for themselves. Although this may seem counterintuitive to many parents and/or family members of a child with special needs, the practical impact of their loved one turning 18-years old means that no other person can legally make a personal, medical, and/or financial decision for that individual until a Judge appoints a guardian or co-guardians for their child or loved one.

Article 17-A

If your loved one is “intellectually disabled or developmentally disabled,” has difficulty making decisions for themselves, and is over 18 years old, then he/she will likely need a guardian to be appointed to make decisions regarding his/her personal needs and/or property management. If a guardian is needed, then you can submit an Article 17-A petition in the Surrogate’s Court where your child or loved one resides. The child or loved one who is the subject of the Article 17-A Guardianship proceeding is referred to as the “Respondent” in the guardianship proceeding.

In addition to the petition, a certification from one physician and one psychologist or two physicians must be filed with the court to certify that the Respondent has a disability and is not able to manage his or her affairs because of intellectual disability, developmental disability, or a traumatic head injury. Once the petition and certifications are approved by the court, a citation will be issued that will provide notice to the Respondent and any other interested party who has not signed a waiver and consent as to the citation return date.

Interested parties usually include close family members and adult members of the household. The Respondent and interested parties will be listed on the citation will need to be served with the citation and will have an opportunity to appear at the citation return date.

GAL or MHLS

In addition to issuing the citation, the court may in its discretion appoint a guardian ad litem (commonly called a “GAL”), or the Mental Hygiene Legal Service (MHLS) if the Respondent is a resident of a mental hygiene facility. The reason the court appointments a GAL or the MHLS is to help the Respondent in the guardianship proceeding and to make a recommendation to the court whether the appointment of a guardian as proposed in the application is in the best interest of the Respondent.

The Respondent and interested parties will be listed on the citation will need to be served with the citation and will have an opportunity to appear at the citation return date.

In most courts, the citation return date is also the hearing date for the proceeding. At the hearing, the person(s) bringing the guardianship proceeding, who is called the Petitioner(s), must be present to testify as to the need for the guardianship. The court will usually require the Respondent to be present unless good cause can be shown why he/she should not be present at the hearing. At the conclusion of the testimony, the court will usually render a decision on the record and if the petition is successful, the court will issue a decree and letters of guardianship soon after the hearing date.

An Article 17-A Guardianship is very broad and covers most decisions that are usually made by a parent for a child such as financial and healthcare decisions.

It is important to meet with an attorney who is experienced in guardianships and can help you determine what type of guardianship proceeding is the most appropriate for your child or loved one with special needs before your child or loved one turns 18 years old.

When considering how to manage the property and/or well being of a person who is a minor, or who may be considered disabled, the need to be appointed a guardian for that person often becomes part of the conversation.

In New York State there are three types of guardianship proceedings whereby a guardian can be appointed. The three guardianship proceedings are as follows:

  • Surrogate’s Court Procedure Act (SCPA) Article 17 – Guardianship of a Minor Child
  • SCPA Article 17-A – Guardianship of an Adult with Developmental and/or Intellectual Disabilities
  • Mental Hygiene Law Article 81 – Guardianship of an Incapacitated Adult

Although each type of guardianship proceeding is authorized by its own law, all three allow for the appointment of a guardian of the person only, a guardian of the property only, or the guardian of the person and property.

Since they are all authorized and guided by separate laws, the process by which a guardian is appointed in each of the types of guardianships will be different.

This blog post will focus on how to become a guardian of a minor child.

When is a guardian of a minor child needed?

Before discussing how to become a guardian, it is helpful to understand when a guardian of a minor child is needed. A legal guardian for a minor child has the same power as a parent to make decisions for the child. A minor child is any person who is 17 years old or younger and not married or in military service.

A minor child may need a legal guardian if the parent is unavailable for any reason. For instance, a legal guardian may need to be appointed to manage the property or personal well-being for a minor child if the parent dies or is too sick to take care of the child and can’t make decisions for the child anymore.

The guardian of the person will be able to make decisions regarding the health, education, social interactions, and living situation for the minor child.

If a child receives assets of $10,000 or more in value for any reason (e.g. as an inheritance, settlement of lawsuit, etc.) then a guardian of the minor child must be appointed to manage his/her property. The guardian of the property is charged with safeguarding the money until the child turns 18 years old. The funds are jointly controlled by the Court and the guardian and no money can be taken out without a court order.

The Process

A SCPA 17 Guardianship proceeding can be started by filing paperwork known as a “Petition for Appointment of Guardian” in the county where the minor child lives. This paperwork can be filed in either Surrogate’s Court or the Family Court. Both Surrogate’s Court and Family Court can appoint a guardian of the person for a child.

However, if there is a need for a guardian of the property to be appointed for the minor child, then the petition must be filed in Surrogate’s Court. In either case, the Judge officially appoints someone to be a guardian with a court order called “Letters of Guardianship,” which specifies the type of guardianship and grants authority to the guardian.

Before a legal guardian is appointed for a child, both parents and any child over 14 years old and who is not mentally, physically, or developmentally disabled must give consent. The Court will consider the minor child’s preferences in the guardianship proceeding. Despite the preferences of the child, the Judge has the authority to appoint a guardian even if the parent or child does not give permission or even disagrees with the guardianship.

A guardian can also be named by the parents or legal guardian of a child in a Will. This person becomes the legal guardian only after the parent dies and the Surrogate’s Court approves the person to be a guardian. It is advisable that all parents who have minor children should have the appropriate Guardianship designations included in their Last Will and Testament and should review their Wills with an estate planning attorney every few years or when a major life event occurs (move to another state, death, birth, divorce, etc.).

Standby Guardian

If a parent is sick and will not be able to take care of or make decisions for a child in the future, that parent can name a “Standby Guardian.” The standby guardian can be a guardian of the person, a guardian of the property, or both, and will have the same powers as a guardian. However, the standby guardianship will not begin until the parent says it will. For example, the parent may specify that the standby guardianship starts when the parent dies or becomes too sick to take of the children. A standby guardian can be appointed by the Court or by written designation and can terminate upon the occurrence of a certain event stated in the designation or upon a decree issued by the court.

It is strongly recommended to speak with an experienced estate planning attorney about establishing a Designation of Standby Guardian for your minor children in addition to a Last Will and Testament that includes the appropriate guardianship designations. The Designation of Standby Guardian will help ensure that there is a trusted family member or friend who can have the necessary legal authority over the minor child from the date of incapacity or death of the parent until the court can appoint a permanent guardian.

In New York State there are three types of guardianship proceedings whereby a guardian can be appointed.

Three Guardianship Proceedings

The three guardianship proceedings, which are established by separate statutes, are as follows:

  • Surrogate’s Court Procedure Act (SCPA) Article 17 – Guardianship of a Minor Child
  • SCPA Article 17-A – Guardianship of an Adult with Developmental and/or Intellectual Disabilities
  • Mental Hygiene Law Article 81 – Guardianship of an Incapacitated Adult

All three types of guardianship statutes allow for the appointment of a guardian of the person only, a guardian of the property only, or the guardian of the person and property. Since a guardian may be appointed based on different laws, the authority of the guardian granted by the court will be different depending on the type of guardianship proceeding.

Powers Granted

All powers granted to a guardian in a guardianship proceeding can be divided into two basic categories:

  • Powers to manage the personal needs of the individual; and
  • Powers to manage the property of the individual

In general, the court may grant the guardian the power to make medical decisions, determine place of abode, social settings, and to manage property and handle financial affairs such as banking, investments, payment of expenses including household and long-term care costs, and taxes for the incapacitated person.

SCPA Article 17 and SCPA Article 17-A

In the case of a guardian appointed under both SCPA Article 17 and SCPA Article 17-A, the guardian’s authority is plenary, which means that the powers are covering all matters related to the personal needs and property management within the statute. The guardian of the property is subject to the court’s oversight as to the property management and must submit accountings of the property at least annually or as the court demands.

MHL Article 81 Guardianship

In an MHL Article 81 Guardianship, the powers granted to a Guardian of the Personal Needs and/or Property Management are tailored to the specific needs of the Incapacitated Person. In granting the powers to the guardian in this type of guardianship proceeding, the court is guided by a least restrictive means test, and any authorities not so granted to the guardian are retained by the Incapacitated Person. This means that if a power is not specifically listed in the Order and Judgment or in a further Order issued by the court, then the Incapacitated Person retains that power.

For instance, if the Order and Judgment provides the power for a guardian of the personal needs to make decisions with regard to the Incapacitated Person’s health care, but does not specifically grant the authority to determine the Incapacitated Person’s place of abode, the Incapacitated Person can chose where he or she will live.

It is very important to consult with an experienced guardianship attorney to discuss what guardianship proceeding is appropriate in your case and what types of powers will be necessary to achieve the goals you have for your loved one.

The concept of converting a traditional IRA to a Roth IRA has been around for a while. However, thanks to the SECURE Act, it may be a more beneficial retirement and tax planning strategy. The way the conversion typically works is you roll over assets from a traditional IRA into a Roth. The withdrawal of the traditional IRA monies will be subject to tax liability, but your remaining assets in the Roth IRA will grow tax-free after the conversion.

Required Minimum Distributions

As stated above, thanks to the SECURE Act, there is a delay in the required minimum distributions (RMDs). This delay will likely result in larger account balances in traditional IRAs, which could mean more tax liability upon withdrawal. This is especially true if your non-spousal beneficiaries (such as your children) are already in their highest-earning years.

Pass Along Roth Assets

Although your non-spousal beneficiaries must still take a full distribution of the Roth IRA within 10 years of your death, they can let the Roth account grow then take the entire distribution in year 10 with no tax consequences since the distribution from a Roth account are tax free. Now that the distributions must be made within 10 years, it may be advantageous to pass along Roth assets as opposed to traditional IRA assets.

It is important to note that paying a large tax bill as a result of a Roth IRA conversion may have a significant impact on your own retirement, so the decision to convert to a Roth IRA should not be made lightly. I recommend that you consult with a qualified professional before taking any action.

A Charitable Remainder Trust (CRT) is an irrevocable trust that allows a person to donate money to a charity while generating an income for either the donor or other beneficiaries with the remainder of the donated assets going to a charity or charities upon the death of the beneficiary(ies) or end of a stated term.

Charitable Remainder Trust as an IRA Beneficiary

One strategy for retirees is to name a CRT as an IRA beneficiary. In the trust, you could name a loved one as the income beneficiary of the CRT. This would allow that person to stretch the taxable distributions out for more than 10 years. At the death of the income beneficiary or at the end of the term of the trust, the balance of the money will pass to the charity(ies) named in the Charitable Remainder Trust.

Speak with an Estate Planning Attorney

This is a good strategy that allows a charity-minded person to donate money to a charity while also generating some income for a loved one. There are some challenges and pitfalls that are involved, so it is important to speak with an experienced estate planning attorney if you are considering this strategy.

Lastly, in our final installment of this series, we’ll take a look at ROTH IRA Conversions.

If you inherit a traditional IRA after the enactment of the SECURE Act, or expect to inherit an IRA in the future, you should consider having a plan in place for withdrawals to avoid a big tax bill.

Tax Liability

Since you have 10 years for the inherited IRA to grow tax-deferred, you may want to consider the nature of the assets held in the IRA, other income sources, and tax deductions available to you. You should also consider the timing of your distributions, as you may want to space out the distributions according to your income and available deductions. This will give you flexibility in managing your tax liability each year until the 10 years runs out.

Professional Help

It is important to consult with a professional who can help guide you and provide insight in order to come up with the best strategy that takes into consideration your tax liabilities, retirement goals, and estate and/or long-term care plan.

Next we will look at Charitable Remainder Trusts.

Prior to the SECURE Act, it was always important to ensure that a qualifying beneficiary designation was made to IRAs and other qualified retirement accounts. This could be an individual or a trust with the appropriate provisions that would allow the qualified retirement account to extend the tax-deferred benefits of the retirement account (commonly referred to as the “stretch”).

If there was no qualified beneficiary designation when the owner of the IRA account died, then the inherited IRA would be subject to tax liability within 5 years (actually by December 31 of the year containing the fifth anniversary of the owner’s death). This was common in situations where the owner either had no living beneficiary or named a non-qualifying trust as beneficiary.

Change Under the SECURE Act

Now, as a result of the SECURE Act, all beneficiaries designated (other than “eligible beneficiaries”) are subject to the 10-year payout rule, which dictates that the Inherited IRA must be distributed to the beneficiary within 10 years of the IRA owner’s death. The distributions will be subject to income tax.

An eligible beneficiary can take advantage of the tax-deferred benefit, delay the distributions, and in certain cases avoid the 10-year payout rule.

If there is no living beneficiary designated, then the 5-year rule still applies under the SECURE Act.

Eligible Designated Beneficiaries

The following are eligible designated beneficiaries who are entitled to the stretch:

  • Surviving spouse of the deceased retirement account owner
  • A minor child of the deceased account owner (subject, however, to the 10-year payout rule once the beneficiary reaches the age of majority)
  • A beneficiary who is not more than 10-years younger than the deceased account owner
  • A beneficiary who is disabled or chronically ill

Given the fact that a surviving spouse is an eligible designated beneficiary, it is a good idea to consider naming your spouse as the designated beneficiary on your IRAs.

It is important to consider who should be appointed as your designated beneficiaries when selecting beneficiaries, and in many cases, you should consider changing your beneficiary designations to take advantage of tax planning strategies.

Next, we will look at planning for inherited IRAs

The SECURE Act has received much buzz since it was signed into law on December 20, 2019, as it will likely impact the retirement and estate planning strategies of many Americans.

The far-reaching law includes significant provisions aimed at increasing access to tax-advantaged accounts (e.g. IRAs, 401(k), 403(b), etc.) and preventing older Americans from outliving their savings.

Key Takeaways

Here are some of the key takeaways from an estate planning and retirement planning perspective:

  • The Act mandates that most non-spouses inheriting IRAs take distributions that end up emptying the account in 10 years
  • The Act pushes back the age at which retirement plan participants need to take required minimum distributions (RMDs) from 70½ to 72
  • The Act allows traditional IRA owners to keep making contributions indefinitely
  • The Act allows 401(k) plans to offer annuities
  • The Act allows parents to withdraw up to $10,000 from 529 plans to repay student loans

Given the changes brought about by the SECURE Act, it might be time to consider the following:

Review (and possibly revise) Your Estate Plan

It is important to establish an estate plan that meets your wishes and accomplishes your goals. It is also important for you to review and update your estate plan whenever there is a major change in your life or in the law. In this case, the major changes in the law resulting from the SECURE Act is a good reason to review your estate plan with an estate planning attorney who is experienced in the areas of tax law, long-term care, and retirement planning.

You should consider having a comprehensive retirement meeting with your estate planning attorney, financial advisor, and accountant when contemplating any changes to your estate and retirement plan. This will help ensure that all the relevant professionals are up to speed with your estate and retirement plan and can provide input related to their field of expertise.

Next week we’ll discuss beneficiary designations.

Before giving a gift to someone, think about what your intention is for the gift because there may be a better way to ensure your intentions while minimizing or eliminating any gift tax implications.

Some transfers are not subject to the gift tax and therefore can be made for any amount.

Here are some examples of transfers (gifts) that are not subject to the gift tax:

  • Gifts between spouses (there’s no tax reason to go cheap for your anniversary!)
  • Payments that qualify for the educational exclusion (e.g. payment of college tuition for a child/grandchild)
    • The payment must be made directly to the qualifying educational organization – NOT to the child/grandchild for them to make the payment
  • Payments that qualify for the medical exclusion (e.g. payment for surgery or medical insurance for a loved one)
    • The payment must be made directly to the person or institution that provided the medical care for the individual (e.g. to the hospital or to the health insurance company)
  • Gifts to political organizations
  • Gifts to certain exempt organizations (e.g. 501(c)(3) charities)

We typically advise clients to think of the value of the gift before making gifts. Let’s take a look at why.

Value of the Gift

Although the annual exclusion from Federal gift taxes is $15,000, this doesn’t mean that you will be taxed on any gift greater than $15,000 in value. If you make a gift of more than $15,000 to one donee, then you will need to file a Federal Gift Tax return (IRS Form 709) to report the gift. The amount of the gift over the $15,000 will reduce your unified estate and gift tax exemption ($11,580,000 in 2020) and will only be subject to gift tax if you have already gifted up to the unified exemption. Any reduction in the unified estate and gift tax exemption could be relevant to your taxable estate when you die.

If you do not have, or expect not to have, $11,580,000 in your taxable estate then the gift reported on the IRS 709 will not result in a gift tax liability in the year you make the gift or result in an estate tax liability.

An Example

Gertrude made gifts of $20,000 to each of her five daughters and made gifts of $10,000 to each of her 13 grandchildren in 2020. She will need to file a Federal Gift Tax return (IRS Form 709) by April 15, 2021, and report the amount of the gifts to each donee that exceeded the annual exclusion amount (i.e., each gift in excess of $15,000) In Gertrude’s case, she would report the five gifts of $20,000, less a credit of $15,000 for the annual exclusion amount, for a net taxable gift of $5,000 to each of her children. The total taxable gift would be $25,000 ($5,000 x 5). This will reduce her unified estate and gift tax exemption by $25,000. If she has never given a gift to any donee greater than the annual gift tax exclusion, then her remaining unified exemption in 2020 $11,555,000 ($11,580,000 – $25,000).

The gifts to the grandchildren will not be reported on the gift tax return and will not reduce her unified exemption since they were less than the annual exclusion.

As always, please reach out to an experienced estate planning attorney to help you navigate these types of scenarios.

One of the most common questions we hear as estate planners is, “How much can I give in gifts without owing any taxes?”

The quick answer is as follows:

The annual exclusion from federal gift taxes in 2020 is $15,000 per donee, and there is no New York State gift tax.

This means that if you are a New York resident and give $15,000 or less to one or more people or entities, then those gifts will not be subject to any gift tax (federal or state).

Although this answer is short and to the point, it does not provide the full picture and there are many broader things to consider when gifting assets.

One such thing that we typically advise clients to think about before making gifts is Medicaid eligibility.

Medicaid Eligibility

A common misconception is that if you give gifts equal to or less than the annual exclusion for federal gift tax then this gift will be exempt from Medicaid’s five-year-look-back period. This is WRONG.

The annual exclusion for gift tax is a tax rule and does not apply to the Medicaid rules in this context.

Even if you gifted money to a loved one for $15,000 or less in value, Medicaid will still count it as a transfer that could make you subject to a transfer penalty period for Chronic Care Medicaid (nursing home) should you apply for it within 5 years from the date the gift is made. This is why it is extremely important to speak with an experienced Elder Law attorney before making gifts when Medicaid benefits may be necessary for the future.

We Can Help

An experienced Elder Law attorney will be able to help you traverse through the complex Medicaid and tax rules and regulations in order to strategically accomplish your goals while mitigating the impact on your tax liability and long-term care planning.

The Setting Every Community Up for Retirement Enhancement Act (more commonly referred to as the SECURE Act) has received a lot of buzz in the estate and retirement planning communities lately thanks to the significant changes it has made to laws related to retirement.

How will the SECURE Act impact my life?

Although the buzz is justified given the many changes to the law related to retirement, the SECURE Act has impacted the law in areas other than retirement.

Here are a few areas that have little to do with retirement, but have been impacted significantly by the SECURE Act:

Qualified Birth or Adoption Distributions–

If you receive an early distribution (before age 59 ½) from an IRA, 401(k), 403(b), or eligible 457(b) deferred compensation plan, then not only will the distribution be subject to an income tax liability, but also a 10% early distribution penalty tax. There are some exceptions to the 10% penalty tax.

The SECURE Act now provides for an additional exception by allowing penalty-free treatment for a qualified birth or adoption distribution of an amount not to exceed $5,000 per parent. This means that parents could take distributions up to $10,000 if both parents qualify and have available assets in their qualified retirement accounts without a penalty. The distributions will still be subject to income tax.

The early distribution must be made within one year from either the birth of the eligible child or the date the adoption of the eligible adoptee is finalized. Under the SECURE Act, an eligible adoptee is any individual, except the child of the account owner’s spouse, who is under 18 years old or is physically or mentally incapable of self-support.

Although it is not specifically referenced in the section of the statute (IRC 72(t)(2)) revised by the SECURE Act, new law indicates that the qualified birth or adoption distribution can be taken with each new birth or adoption.

The rules also allow for the repayment of the qualified birth or adoption distribution at a later time regardless of the plan/IRA contribution limit. This repayment can be made incrementally or at once from either the plan the distribution was made or an IRA. Since the law is silent on the repayment deadline, the IRS may issue regulations clarifying the timing of the repayment.

This could be a very helpful option for parents who have incurred significant costs related to the birth or adoption of a child.

Section 529 Plan distribution–

A Section 529 plan is a college savings plan that offers tax (federal and state) and financial aid benefits. If the 529 plan satisfies the basic requirements, the federal and state tax law provides tax benefits. These tax benefits may include tax-free qualified distributions and state income tax deductions or credits, depending on the state. New York is one of 33 states and the District of Columbia that offer residents a tax deduction or tax credit for 529 plan contributions.

The SECURE Act now allows federal-income-tax-free 529 distributions to cover apprenticeship costs, some homeschooling expenses, and up to $10,000 of qualified student loan principal and/or interest payments.

The distribution of $10,000 for payment of qualified student loan principal and/or interest payments is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. For example, a parent who has 2 children may take a $10,000 distribution to pay student loans for each child for a total of $20,000.

Although these changes will likely provide more options for families and students, it is important to note that this is a federal law that may not apply to your state law, and you may suffer a tax detriment if you make a non-qualified withdrawal.

This means that if you are a New York resident and you use funds from the NY 529 Plan to pay for your child/grandchild’s student loans (or any other non-qualified distribution), you may be subject to recapture of the state income tax deduction for the 529 contribution.

The last time the federal law changed to expand the qualifying education expenses to include K-12 tuition under the TCJA, New York and some other states did not comply with the federal law. So, it is very possible that New Yorkers may not get the benefit of the 529 plan changes brought on by the SECURE Act.

It is important to confirm your state’s 529 Plan rules with a qualified professional to ensure that you will receive the maximum tax benefits offered and not inadvertently cause any tax detriments.

The increased minimum penalty for failure to file federal returns–

If you file a federal income tax return more than 60 days late (absent reasonable cause), you will be subject to a failure-to-file penalty. The failure-to-file penalty is normally 5% of the unpaid taxes for each month or part of a month that a tax return is late. However, a minimum penalty is assessed in certain cases.

The SECURE Act increases the minimum penalty for failure-to-file federal tax returns to the lesser of $400 or 100% of the amount of tax due. This change applies to returns that are due in 2020 and beyond, including any extensions.

Kiddie tax rates retroactively repealed–

The SECURE Act retroactively repeals the portion of the Tax Cuts and Jobs Act of 2017 (TCJA) that imposed a higher tax rate on certain children and/or young adults who received unearned income, such as interest, dividends, and long-term and short-term capital gains. These taxes are commonly referred to as the Kiddie Tax. Generally speaking, the TCJA effectively changed the Kiddie Tax rates from the parent’s marginal federal income tax rate to the same rates paid by trusts and estates, which typically results in much higher tax liability for the child.

The new law reinstates the Kiddie Tax rates to the tax rates in effect prior to the TCJA, which means the calculation to determine the Kiddie Tax is once again based on the parent’s marginal tax rate. This is a huge benefit to children and young adults with substantial investment income.

Every April 15 millions of taxpayers throughout the United States file their income tax returns. Prior to filing their returns many taxpayers will go through their records to organize their income, deductions, and credits, and meet with their tax advisors/preparers to review and finalize their income tax returns.

You can take this opportunity to speak with your tax advisor/preparer about income tax strategies for 2020. Here are some “need to know” tax facts for 2020 that will help you with that conversation:

Federal Marginal Income Tax rates for 2020

 

Tax RateSingleMarried filing jointly
37%, for incomes over$518,400$622,050

 

35%, for incomes over

 

$207,350

 

$414,700

 

32% for incomes over

 

$163,300

 

$326,600

 

24% for incomes over

 

$85,525

 

$171,050

 

22% for incomes over

 

$40,125

 

$80,250

 

12% for incomes over

 

$9,875

 

$19,750

 

Federal standard deductions for 2020

 

Filing StatusStandard Deduction
Single$12,400
Head of Household$18,650
Married Filing Separately$12,400
Married Filing Jointly$24,800
Qualifying Widow(er)$24,800

 

An additional standard deduction amount for individuals who are blind and/or age 65 or older is $1,300 per spouse for married couples and $1,650 for single filers.

 

Net Investment Income Tax (NIIT)

This is a 3.8% surtax on net investment income affecting single taxpayers with more than $200,000 in modified adjusted gross income (AGI), and married couples filing jointly of more than $250,000 of modified AGI. Examples of investment income include interest, capital gains, dividends, rental income, royalties, income from non-qualified annuities, etc.

Child Tax Credit

$2,000 per “qualifying child” under 17 years old at the end of the year. There is an additional $500 tax credit that applies to other qualified dependents who are not qualifying children, such as a dependent child age 17 or older. The tax credit phased out as income exceeds $200,000 for single taxpayers and $400,000 for married couples filing jointly.

State and local taxes (SALT) deduction

The SALT deductions are still capped at $10,000 in aggregate per return, per year.

Mortgage Interest Deduction

Deductions of interest up to $750,000 (or $375,000 for married taxpayers filing separately) of aggregate mortgage debt used to build, acquire, or improve a property. This includes interest on a Home Equity Line of Credit (HELOC). Debt acquired prior to 12/15/2017 are grandfathered into the prior rules, which allow deductions for interest on mortgage up to $1 million.

Medical Expense Deduction

Thanks to a recent change in the law, medical expenses are deductible by all taxpayers who itemize their deductions, where non-reimbursed medical expenses exceed 7.5% of AGI for tax years beginning before January 1, 2021. Thereafter, the threshold is set to increase to 10% of AGI.

Estate/gift tax

The Federal unified estate and gift tax exemption in 2020 is $11,580,000 per estate ($23,160,000 for married couples who die in 2020). The New York State estate tax exemption is $5,850,000. Although there is no gift tax in New York State, certain taxable gifts made by New York residents within 3 years of death will be includible in their NYS taxable estate.

The federal annual gift tax exclusion amount remains at $15,000 in 2020.

You can give to a charity whenever you are able and willing to make a donation. However, for tax purposes, if you want the contribution to be tax-deductible in a given year you must make the donation by the end of the tax year.

A contribution is deductible in the year in which it is paid or submitted for delivery. Dating a check for the last day of the year and then sending the check the beginning of the following year does not constitute payment in the intended tax year. However, putting the check in the mail to the charity by the end of the tax year constitutes payment even if the charity does not cash the check or even receive the check until the next tax year.

Likewise, a contribution made on a credit card is deductible in the year it is charged to your credit card, even if payment to the credit card company is made in a later year.