2020 tax planning strategies have been difficult to advise. The COVID-19 pandemic made 2020 a year of uncertainty. To top it off the election results, on January 5, 2021 for run off senate seats in Georgia, may bring future tax changes. Before the close of the tax year there are effective steps to take now to save on your income taxes. These strategies can help for current and future returns, maximize retirement funds, reduce future estate taxes, and aid in cash flow management.
CARES Act
Firstly, the Coronavirus Aid, Relief, and Economic Security, CARES, Act made changes for both individuals and businesses.
- Postponement of the required minimum distribution, RMD, in 2020
- Changes to deductible charitable contributions in 2020
- Waiver of 10% Penalty for early distribution for anyone under age 59½ for those who are diagnosed with COVID-19 experiencing adverse financial consequences resulting from quarantine, inability to work due to lack of child care, reduction of work, furlough, lay-off, or owner or operation of business forced to reduce hours due to COVID-19
- Changes to certain retirement plan loans applying to those impacted by COVID-19
SECURE Act
Secondly, Setting Every Community Up for Retirement Enhancement, SECURE, Act also made change.
- Increased required minimum distribution in 2020 to 72
- Repealed maximum age for contributing to a traditional IRA
- Repealed Kiddie tax rules from Tax Cuts and Jobs Act, TCJA, of 2017
TCJA
Thirdly, the TCJA brought many changes to individuals and businesses.
Changes for individuals includes:
- lower tax rates
- no personal exemptions
- higher standard deduction
- reduced alternative minimum tax (AMT)
- increased child tax credit
Business changes include:
- reduced corporate tax rate of 21%
- limits on business interest deductions
- no corporate AMT
- overly generous depreciation and expensing rules. A special 20% deduction rate for non-corporate taxpayers who had qualified business income from a pass-through entity
2020 Year End Tax Strategies
For this unusual year 2020 tax planning strategies we advise clients to be aware of the tax uncertainty that is possible. The uncertainty with a new president in office and the senate status left unknown may cause higher tax rates in the coming years than for tax year 2020. Here are other actions to take in order to reduce 2020 tax liabilities.
- Prepaying mortgage payment to accelerate the interest deduction
- Accelerate purchases of business equipment and place in service for intended year
- Pay any margin interest, at year end is only deductible if paid
- Take advantage of the 20% deduction for qualified business income
- Convert traditional IRAs to Roth IRAs, especially if loss of value with hopes to increase again
- Best tax use of capital gains and losses, taxable gains apply $3,000 against ordinary income and carry forward the balance
- Year-end gifts of appreciated property in order to shift taxable gain to lower bracket family
- Gift money today to reduce future estate tax
- Maximize health savings account, HSA, by contributing can lower your taxes
- Dispose of passive activities for suspended losses
- Increase withholding on salaries and wages to avoid estimated tax underpayment penalties
- Planning for beneficiaries of qualified retirement plans and IRAs
- Gift money in 2020 rather than later, probability of eliminating the at-death step-up in the basis of inherited assets, gift and estate tax exemption reduction possible as well
- Strategize qualified charitable distributions, CARES Act raised limit of charitable donations to public charities from 60% to 100% of AGI
- Donate proceeds of depreciated investments to offset realized gains, if itemize add to charitable contributions
Conclusion
These planning moves should be made by year-end to achieve maximum overall tax savings for 2020 and later tax years. Please reach out to us before the year end to see how we can help you!
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