Dear Tax Constituent:
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2020 takes place against the backdrop of the continued release of guidance on the landmark Tax Cuts and Jobs Act (TCJA) as well as the Families First Coronavirus Response Act and the Coronavirus Aide, Relief and Economic Security (CARES) Act, enacted in response to the COVID-19 pandemic, which changed some of the TCJA provisions for 2020.
For individuals, the TCJA changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT).
For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special 20% deduction.
The CARES Act made changes for both individual and business taxpayers, including:
Creating a $300 partial above-the-line charitable contribution for individuals taking the standard deduction and expands the limit on charitable contributions for itemizers.
Waiving the 10% early-withdrawal penalty on retirement account distributions for individuals facing virus-related challenges.
Excluding from an employee's taxable income certain employer payments of student loans on behalf of employees.
Allowing businesses a five-year carryback of net operating losses (NOLs) earned in 2018, 2019, or 2020 . The NOL limit of 80% percent of taxable income is also suspended, so businesses may use NOLs they have to fully offset their taxable income in carryover years.
Increasing the net interest deduction limitation, which limited businesses ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax, depreciation and amortization (EBITDA), to 50% of EBITDA for 2020.
The best year-end tax planning strategy for many taxpayers may still be to follow the time-honored approach of deferring income and accelerating deductions to minimize 2020 taxes. Deferring income also may help you minimize or avoid adjusted gross income (AGI)-based phaseouts of various tax breaks that apply for 2020. As always, however, year-end tax planning doesn't occur in a vacuum. It must take account of each taxpayer's specific situation and planning goals, with the aim of minimizing taxes to the greatest extent possible.
While most taxpayers will come out ahead by following the traditional approach, others with special circumstances may do better by accelerating income and deferring deductions. In some situations, total combined taxes for 2020 and 2021 will be reduced if income is accelerated from 2021 into 2020 and certain expenses are deferred to 2021 where they may give a greater tax benefit in that year.
Businesses should keep in mind that even if COVID-19 has negatively impacted your income for 2020, if you received a Paycheck Protection Program (PPP) loan and were granted forgiveness, the related expenses you used PPP funds for will be treated as non-deductible under current guidance. This could make your 2020 taxable income higher than expected.
In addition to shifting income and expenses, there are several other actions taxpayers can take before the end of the year to reduce their 2020 tax bills:
Maximizing the 20% deduction for qualified business income when constrained by limits related to W-2 wages paid by the business or basis in business assets;
Utilizing expanded Code Sec. 179 expensing and 100% first-year bonus depreciation;
Year-end moves to reduce or eliminate the 3.8% surtax on net investment income;
Making the best tax use of capital gains and losses;
Converting traditional IRAs to Roth IRAs;
Planning moves for beneficiaries of IRAs and qualified retirement plans;
Year-end strategies for qualified charitable distributions;
Increasing withholding on salaries and wages to avoid the estimated tax underpayment penalty;
Making year-end gifts of appreciated property to shift taxable gain to lower-bracket family members while taking advantage of the annual gift tax exclusion; and
Disposing of passive activities to free up suspended passive losses.
These are just some of the year-end steps that can be taken to save taxes.
If you would like more information on these topics or another tax topic of interest to you, please contact our office.
—McAvoy + Co, CPA