Year-end planning for 2020 takes place during the COVID-19 pandemic, which in addition to its devastating health and mortality impact has widely affected personal and business finances. New tax rules have been enacted to help mitigate the financial impact of the disease, some of which should be considered as part of this year’s planning. A brief rundown of current changes as well as other planning options are included below.
Major tax changes from recent years generally remain in place, including lower income tax rates, larger standard deductions, limited itemized deductions, elimination of personal exemptions, an increased child tax credit, and a lessened alternative minimum tax (AMT) for individuals. Major corporate tax changes also remain in place including tax rate reduction and elimination of the corporate AMT, limits on interest deductions, and generous expensing and depreciation rules for businesses. Non-corporate taxpayers with income from pass-through entities are still entitled to the valuable qualified business income deduction.
Year-End Tax-Planning Moves for Individuals
…Many taxpayers received direct stimulus payments under the CARES Act which are defined as advanced credits on the 2020 federal income tax return. These payments are not taxable income. Qualification for payments was based on 2018 or 2019 tax filings. If you qualified for and received a payment based on your 2018 or 2019 return, the amount will be included on your 2020 return as a credit offset whether you qualify based on your 2020 adjusted gross income or not. You will get to keep the money regardless. If you didn’t receive a payment because you didn’t qualify in 2018 or 2019, you will qualify for a credit if you are under the income limitation in 2020.
…Significant changes to charitable contributions have been made as part of the CARES Act in an attempt to help struggling charities during the pandemic. Nonitemizers can claim an “above-the-line” deduction up to $300 for donations made to charities during 2020. This is in addition to the standard deduction and is the same for single or married filing joint filing status. Additionally, charitable deductions are normally limited to 60% of adjusted gross income. This limitation is suspended for 2020 allowing donors to offset up to 100% of income.
… Required minimum distributions (RMDs) that usually must be taken from an IRA or 401(k) plan (or other employer-sponsored retirement plan) have been waived for 2020. This includes RMDs that would have been required by April 1 if you hit age 70½ during 2019. So if you don’t have a financial need to take a distribution in 2020, you don’t have to. Note that because of a recent law change, plan participants who turn 70½ in 2020 or later needn’t take required distributions for any year before the year in which they reach age 72. Just because you don’t have to take an RMD, circumstances might make taking a distribution or making a Roth conversion a good idea depending on other factors affecting your tax year.
…The 10% penalty on early distributions from retirement plans or IRAs is waived on up to $100,000 of corona-virus related distributions. Tax on these distributions can be paid over three years, beginning with the payout year. Amounts recontributed within the three year time span will be treated as rollovers and not be taxable.
… If you are age 70½ or older by the end of 2020, consider making 2020 charitable donations via qualified charitable distributions from your IRAs. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. With the suspension of RMDs for 2020, this item may not be applicable for this year but should be a planning point for future years for many taxpayers.
…The use of net operating losses had been limited in recent years, generally allowing losses to be carried forward only. The CARES Act changed this for losses incurred in 2018, 2019 or 2020 requiring losses to be carried back up to five years unless the taxpayer elects to carry them forward. This allows for the possibility of immediate refunds for those that qualify. The legislation also suspends the 80% taxable income limit, allowing the NOL to offset 100% of income.
… Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $80,000 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2020 is $75,000 then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won’t yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.)
… If you were in a federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or on the return for the prior year (2019), generating a quicker refund.
Year-End Tax-Planning Moves for Businesses & Business Owners
… The SBA Payroll Protection Plan (PPP) loan program looms large as year-end 2020 planning ramps up. Companies are filing forgiveness applications and the tax consequences of these loans need to be considered in year-end planning. There could be different scenarios depending on timing and methods of accounting used by taxpayers.
… Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for singles, marrieds filing separately, and heads of household, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $326,600 and $426,600, and to all other filers with taxable income between $163,300 and $213,300.
… Businesses can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used if purchased and placed in service this year, and for qualified improvement property (generally, any improvement to a building interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, HVAC, fire protection, alarm, and security systems. The traditional Section 179 deduction is also still available in increasingly generous amounts and may be a better choice. Typically, the Section 179 deduction is allowed by most states where bonus depreciation has been limited by many states. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.
These are just some of the items to consider to plan for year-end. Again, by contacting us, we can review your particular circumstances to see if any actions make sense for you.