Your Guide to Tax Planning

It happened again.  Tax season is right around the corner.  Talking to your accountant about tax strategies throughout the year is always best, however; there is still time to avoid a tax bill or increase your refund in 2020.  For some, your options are limited.  That being said, it’s been said a zillion times and I am saying it again – 2020 is the year to expect the unexpected.

The Tax Cuts and Jobs Act (TCJA) that passed at the end of 2017 will continue to affect most tax returns due in 2021.  Most of the over 100 new tax laws went into effect in 2018.  A few provisions will pan out in 2020.  You will see references to TCJA throughout this guide.  In addition to one of the biggest tax reforms in my thirteen plus years in the accounting field, the biggest pandemic I’ve ever been impacted by in my adult life has brought forth confusing and ever-changing tax laws including the CARES Act and SECURE Act this year.  For those of you simply interested, buckle up.  This year’s a doozy.

Let’s start with what most of us are required to file: 

Form 1040 Federal Tax Return for INDIVIDUALS:

New to You in 2020 . . . Maybe?

In 2020, if you filed and received your 2019 federal income tax return refund then you most likely received a separate payment from the IRS for interest.  Interest payments are taxable and are reported on Form 1099INT, Interest Income, to anyone who received interest of at least $10.  Keep on eye out this form in 2021 and report it on your taxes.  Some taxpayers are very familiar with this . . . it’s business as usual for you.

Itemized Deductions:

Many of you who itemized your deductions in years past ended up claiming the standard deduction post-TCJA.  TCJA changes reduced or eliminated many itemized deductions through 2025 unless Congress acts now to make these changes permanent.

Here’s why:

• The standard deduction nearly doubled.  In 2020, single filers standard deduction is up to $12,200 and $24,800 for married couples (these amounts will increase annually for inflation through 2025)

• Personal exemptions are still suspended and many of the most utilized itemized deductions have been eliminated or limited

• State and local income and sales tax deduction is limited to $10,000.  This includes property taxes.

• Mortgage interest deduction remains; however, it reduces the mortgage debt limit from $1 million to $750,000 for debt incurred after December 15, 2017 with some exceptions.

• Home equity interest deduction is now only allowed if the funds were used to buy, build, or substantially improve the home that secures the home equity loan or line of credit. 

• Miscellaneous itemized deductions subject to the 2% of adjusted income floor is suspended.  This includes deductions such as home office deductions for employees, job expenses, advisory fees, and moving expenses – with few exceptions. 

• Exceptions include impairment-related work expenses for persons with disabilities, educator expenses up to $250 or $500 for married couples, armed forces reservist, and qualified performing artist.

Here’s what to do:

• Medical expenses could be a determining factor in itemizing so total your medical expenses now and schedule any last minutes appointments in December if you are close the reaching the threshold

  • Unreimbursed medical expenses threshold holds at 7.5% of your adjusted gross income (AGI) in 2020

    • Ex: AGI is $150,000, every dollar over $11,250 (7.5% of $150,000) is deductible in 2020

  • Medical expense example include payments to doctors, dentists, glasses, contacts, hearing aids, supplies, diagnostic devices, prescriptions drugs, travel expenses related to medical care, and miles driven for health care purposes at 17 cents per mile for 2020

  • If you have the option of controlling the timing of any elective medical procedures, services, and purchases (without negatively affecting you or your family’s health) consider ‘bunching’ these expenses into alternating years.  This will benefit you if it will help exceed the 7.5% threshold and if you plan on itemizing.  

• Charitable giving AGI limits are temporarily suspended if certain criteria are met

  • Typically, deductions for charitable contributions cannot exceed 60% of your AGI; a reduced limit of 30% and 20% for certain contributors; contributions exceeding 60% can be carried forward and deducted for up to five years

    • Criteria to qualify for up to 100% of your AGI include:

      • a cash contribution;

      • made to a qualifying organization;

      • made during the calendar year 2020

    • Non-cash donations do not qualify for this relief due to due COVID-19; however, you may still claim contributions subject to normal limits . . . see above ‘typical deduction’

  • Due to the increased standard deduction, bunching your charitable gifts to one year (the year you anticipate itemizing) and taking a standard deduction on the following year may increase your overall deductions over two years

    • New Charitable Deduction Allowance for taxpayers who do not itemize deductions of up to $300 for cash contributions made in 2020 to qualifying organizations.

  • Donations records should include cash amounts, official charity receipts, canceled checks, value of donated property, miles driven, and out-of-pocket expenses

Alternative Minimum Tax (AMT)

The TCJA increased AMT exemptions through 2025 which means fewer taxpayers are affected by this separate tax. 

What is AMT?  It is a tax system implemented to ensure high-income individuals with many tax deductions pay their fair share of taxes.  Prior to TCJA modifying the exemption amounts, AMT had not been adapted properly for inflation leaving middle-class taxpayers susceptible.  Your tax advisor can tell you if you need to plan for this.

Defer and Offset Capital Gains

What’s a Capital Gain?  If you invest in stocks, bonds, or property and sell your investment for a profit, you are taxed on the sale. 

Keep these factors in mind:

• Take capital gains next year if you expect to be in the same or lower tax bracket in 2021

  • Do not defer capital gains if you expect higher income in 2021 tax year as annual tax bracket changes may mean greater taxes for you

• More importantly for high-income taxpayers, selling underperforming investments to realize losses will offset taxable gains during the year

  • Up to $3,000 of excess losses can usually be used to offset ordinary income and can be carried forward

Contribute to Retirement Accounts

The deadline for certain retirement accounts are after December 31st so talk to your retirement advisor now.

Here are contributions amounts to keep in mind:

• 401(k) base contribution: $19,500 (up from $19,000 last year)

• 401(k) catch-up contribution (for taxpayers age 50 and older): additional $6,500 (up from $6,000 last year)

• IRA base contribution: $6,000

• IRA catch-up contribution (for taxpayers age 50 and older): additional $1,000 (unchanged)

Many retirement plans allow you to contribute up until October 15, 2021 if you file an extension for your 2020 tax return.

Dependent, Child, and Adoption Credits

TCJA eliminated personal exemptions in 2018.  For individuals with dependents (such as children or elderly parents) you may now qualify for a tax credit anywhere from $500 (family credit) to $2,000 (child credit) to make up for losing out on personal exemptions.  Adoption credits for 2020 have increased to up to $14,300 per child.  These credits are subject to an income-based phaseout; however, the income ranges are higher than they were pre-TCJA. 

New in 2020 Credits

If one of the following applies to you and you meet the eligibility requirements to receive a Economic Impact Payment (aka Stimulus Payment) and did not receive it in 2020, you may be able to claim the Recovery Rebate credit:

• They are single and received less than $1,200; or

• They are married for 2018 or 2019 and received less than $2,400; or

• They did not receive $500 for each qualifying child.

Health Insurance Mandate

Individuals who did not have health insurance under the Affordable Care Act were paying a penalty when taxes were filed and paid to the IRS.  Effective 2019, if you do not have health insurance TCJA zeroed out the penalty called the shared responsibility payment, often referred to as the individual mandate penalty.  Some states do have health insurance mandate on the state level.

Alimony Income and Deductions

Under a divorce or separation agreement executed after 2018 or executed before 2019 but later modified if the modification expressly states the repeal of the deduction for alimony payments applies to the modification.  What does that mean?  Essentially, if you paid alimony or received alimony in 2020, you will not deduct your payments or report the money received as income on your tax return.  Elimination of the alimony deduction and income is a TCJA change that will affect divorce and separation agreements modified or made in 2019 and henceforward. 

SMALL BUSINESSES:

Business Structure

You decided your business structure but now with the changes to the tax law it may be beneficial to re-evaluate.  Corporations are now subject to a flat tax rate of 21% and corporate AMT has been removed.  This is considerably lower than the top individual rate of 37%.  For all other pass-through entities (LLC’s - sole proprietorships or partnership – and S Corporations) you may be subject to the top individual tax rate and you may also receive up to 20% qualified business income deductions.  Your accountant can help you decide if a change will benefit you.

Maximize the Qualified Business Income (QBI) Deduction

One of the most significant business changes passed under TCJA is the Sec. 199A deduction that remains in effect until 2025. 

Important factors related to this deduction include:

• To qualify you must be a pass-through entity which is defined for this deduction as single member LLC sole proprietorships, multi-member LLC partnerships, and S Corporations.

• It is only available to non-corporate taxpayers

• The deduction can be up to 20% of the pass-through entities QBI

• This is a “below-the-line deduction” which means it reduces taxable income

There are several layers of complexity to this deduction.  Your tax-pro can determine if you qualify for this.

Defer Income and Accelerate Expenses: ONLY if you anticipate the same or lower tax bracket next year

Here’s how for cash method accounting businesses:

• Delay invoices until late December so payment comes in 2021

• Accelerate deductible expenditures so expenses are taken in 2020

• You can claim 2020 expenses on your credit card bill even if you won’t pay it off until 2021

• Pay expenses via checks and mail them before year-end

If you anticipate more income in the upcoming year, do the opposite by postponing deductible expenditures until 2021 and accelerate income into this year.

Purchase New and Used Property

Property acquired and placed in service in 2020 may mean you can write off the entire cost.   

Important items about purchasing assets include:

• New and use heavy vehicles used for over 50% business may qualify

• Specifically, for SUV, pickup, or van’s with a manufacturers gross vehicle weight rating (GVWR) above 6,000 pounds

• The definition of qualified assets expanded to include assets typically not available for additional first year write offs

• If assets were purchased during the last quarter of the year, you may not be eligible a 100% write off

• Special rules apply for certain real estate business

Planning in advance to help maximize your depreciation deduction with your accountant will ensure you take advantage of these changes.

Employee Benefits

Are you in a position to offer benefits to your employees?  Offering benefits increases employee retention and saves you taxes.

Consider retirement packages, health savings, flexible spending, and health reimbursement accounts, along with fringe benefits such as life and health insurance.

Although the individual health insurance mandate has been lifted in 2019, some ‘large’ employers can still be penalized for not offering ‘minimum essential coverage’ to full-time employees.  Smaller businesses offering health insurance may still qualify for a health care tax credit.

Additional Tax Credits

Other tax credits businesses still qualify for include the general business tax credit, credit for small employer health insurance premiums, credit for paid family and medical leave, alternative fuel and motor credits, disabled access credit, credit for employer-provided childcare facilities and services, rehabilitation, energy, and reforestation investment credits, research credit, work opportunity credit, retirement plan credit, and new markets credit – and the list goes on.

Contribute to or Establish Retirement Accounts

Most retirement accounts allow for significant deductible contributions. 

Here are a few important items to know:

• Deadlines for setting a SEP-IRA for a sole proprietorship is October 15, 2021 if you file an extension for your 2020 tax return

• Other types of retirements usually must be established by December 31st

• Simple IRA’s must be established by October 1 so you have missed the deadline for 2020 – start planning for next year now!

Other general know how’s for this year include delays.  Not a new thing for this year but I think it’s an important reminder.  If your refund does come early CELEBRATE! and count your blessings!  In all seriousness, don’t bet on your tax refund to make major purchases this year.  The IRS is asking professionals to inform their clients to expect longer processing times and additional reviews this year. 

As in years past, any taxpayer claiming the earned income credit or additional child tax credit will not be issued any part of your anticipated tax refund until sometime mid-February.  Paper returns are also a sure way to wait even longer to receive your refund.  Expect at least an additional 6-8 weeks in processing.  Direct deposit with e-filing for your returns this year means easy status tracking and faster refunds.  For all my clients, this is your only option for this year unless you are amending your returns!

There are many other ways to increase your refund or eliminate your tax bill and it is a whole lot easier to do when you keep your books up to date and current.  Tired of being hit with one surprise bill after another or just ready to get handle on this tax stuff? Start interviewing accountants, tax pros, bookkeepers and see what’s out there.  One things for sure, running a business successfully means knowing the numbers.