To say COVID-19 has made 2020 a disastrous year for just about everyone would be an understatement. In response to the economic slowdown and losses of income, Congress passed several extensive laws to benefit individuals and businesses that suffered financial hardship because of COVID-19. However, 2020 has given rise to more than the usual tax planning opportunities. Thus, you may find it appropriate to schedule a tax planning appointment before the close of the year to take advantage of the tax benefits and strategies available for 2020. Although everyone’s situation is unique, the following are examples of tax opportunities and strategies that may apply to you.
Individual Planning Opportunities
Did You Collect Unemployment Income This Year? If you did, you should be aware that it is taxable for federal purposes and that most states also tax unemployment benefits. Even if you had taxes withheld from the unemployment payments, don’t be misled into thinking it will be enough. Generally, the tax withheld from unemployment compensation is insufficient, especially when the extra $600 weekly amount of federal pandemic benefits is considered. It may be appropriate to see what effects the unemployment income will have on your taxes and avoid any unpleasant surprises next year when your return is prepared.
Did You Skip the Required Minimum Distribution (RMD) for 2020? Taxpayers were allowed to skip their RMD from their IRAs and most other retirement plans for 2020. But that might not be your best tax move, especially if you can take a distribution that will result in no or minimal taxes for this year. It may be appropriate to discuss whether you should take a distribution or not. We might be able to determine an amount that can be withdrawn tax-free.
Are You the Charitable Type? If so, 2020 offers a variety of ways to make contributions, including donating unused time off from work (if your employer participates in the program). The AGI limitation for deducting cash contributions has been increased significantly, and non-itemizers can make a deductible contribution of up to $300 (pending legislation may change the amount). Of course, a taxpayer over age 70½ can make contributions directly from a traditional IRA to a qualified charity. We can determine the method or combination of methods best suited to your particular circumstances.
Did You Have a Large Increase in Income This Year? If so, you might want to explore the benefits of a donor-advised fund, which will allow you to make a large deductible charitable contribution this year and meet your future charitable obligations by distributing the funds in upcoming years.
Divorced or Separated This Year? Divorce creates numerous issues that can have profound implications on your tax return and the amount of your tax liability. For example, who takes credit for the kids, allocating taxable income, who benefits from tax credits and deduction carryovers, alimony and who is responsible for the tax liabilities are just a few issues to consider. It might be appropriate to project your tax liability in advance, so you can prepare for the outcome.
Do You Have Health Insurance? Although the federal government no longer penalizes individuals for not having minimal essential health insurance, some states do. The penalties can be a substantial amount of money and should be considered in year-end tax planning.
Did You Suffer a Disaster Loss in 2020? There are special rules related to evaluating the losses incurred as the result of a disaster, and the results are likely quite different from what you might imagine.
Did Your Child File a Tax Return in 2018 or 2019 Under the Kiddie Tax Rules? If so, Congress has retroactively provided an alternative computation that could result in a substantial refund.
Congress Extended Tax Benefits That Expired After 2017. Some of those benefits may apply to you for 2020. Or, you can amend your returns for 2018 and 2019 (as appropriate) to take advantage of the following benefits: forgiveness of qualified principal residence debt income; deduction of mortgage insurance premiums; credit for energy-efficient home improvements; and credits for fuel cell vehicles, two-wheeled electric vehicles and alternative fuel refueling property.
Did You Sell Your Home This Year? If so, and you meet the ownership and occupancy tests, the gain from selling your main home will not be taxed up to $250,000 ($500,000 if you file a joint return with your spouse). If you don’t meet the requirements of both owning and using your home for at least 2 years in the 5 years prior to the sale date, you may still qualify for a partial home sale gain exclusion. For example, you may qualify for a reduced exclusion if you sold your home to relocate this year because of a change in employment or due to health. We can determine the amounts of excluded income and taxable gain, and project how your taxes will be impacted.
Have You Prepaid Enough Tax for 2020? One of the reasons for doing year-end tax planning is to determine if the tax you’ve already paid through withholding or estimated tax payments will be sufficient to cover your tax for the year in order to avoid a penalty for underpayment of estimated tax. If there’s a shortfall, we can see what steps you can take either to reduce the tax (perhaps by increasing your retirement plan contributions or bunching deductions) or increase your withholding for the rest of the year.
Business Planning Opportunities
Did You Place Qualified Improvement Property in Service During 2018, 2019 or 2020? Congress made a retroactive law change that allows a business owner to expense the costs of qualified improvement property in the year when it goes into service. This is instead of depreciating the cost of the improvement and claiming that deduction over a number of years. Qualified improvement property generally means any improvement to an interior portion of a building that is nonresidential real property, if the improvement is placed in service after the date the building was first placed in service.
Did You Have a Business Loss in 2018 or 2019? If you incurred a net operating loss (NOL) in 2018 or 2019, changes made by the CARES Act retroactively allow taxpayers to carry those losses back 5 years. This entails amending your returns for the earlier years to deduct the loss being carried back in order to get a refund on income taxes paid in those years.
Are You a Working Shareholder in an S Corporation? If so, you may not be aware of the IRS’s “reasonable compensation” requirements, which can influence your Section 199A (qualified business income) deduction and payroll taxes. Reviewing the requirements as they apply to your particular circumstances may avoid future problems with the IRS.
Did You Secure a Paycheck Protection Program Loan From the SBA? If so, you will need to apply for loan forgiveness if you haven’t already. The SBA forgiveness applications can be quite challenging. We can assist with completing the application and help you maximize your forgiveness.
Did You Have a Large Capital Gain in 2020? If so, you may want to consult with us about investing in a Qualified Opportunity Fund (QOF) to defer the taxable gain until 2026. Unlike Section 1031 tax-deferred exchanges, only the profits need to be invested in a QOF, not all the proceeds from the sale that resulted in the capital gain.
Other Planning Ideas
In addition to the situations above, some customary tax planning issues may also apply to you in 2020. Here are some examples:
- You could bunch deductions to itemize in one year and take the standard deduction in the subsequent year.
- Depending on your 2020 income, it may be appropriate to accelerate or defer your income and deductions. This will be especially crucial during 2020.
- Are you considering marriage or divorce? Some circumstances might warrant waiting until after the end of the year.
- If you expect your income to be abnormally low in 2020, this may be an opportunity to cash in on stock gains or exercise stock options while incurring little or no tax liability.
- As always, those with large estates may find it appropriate to make annual gifts of $15,000 per recipient (no limit on the number of recipients) to reduce the value of the estate. Married couples can gift $30,000 to each recipient. Giving appreciated assets will transfer the taxable gain to the recipient.
Opportunities for tax benefits and reducing your tax liability abound for 2020. Please contact our office for a virtual tax planning appointment and continue to be safe during these trying times.