2020 Tax Planning Strategies

Brittany Becker, CPA (Oct, 2020)

As this unusual year comes to an end, one with unanticipated 2019 extended tax filing deadline twists, it’s now time to start gearing up for the 2020 tax filing season.  It is not too late to do some 2020 tax planning. You want to be in the best tax position by year-end, which means making the right moves now.

2020 Tax Planning Strategies:

  • Retirement Plan Distributions – Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the Internal Revenue Code Sec. 72(t) 10% additional tax for early distributions. Eligible distributions can be taken through December 31, 2020.  These distributions can be repaid within three years. Eligible taxpayers include one who has been diagnosed with the SARS-CoV-2 virus or COVID-19 disease, or whose spouse or dependent had been diagnosed, someone who experiences adverse financial consequences from being quarantined, furloughed, laid off, or who is unable to work due to a lack of child care. Along with this, the CARES Act temporarily suspended 2020 required minimum distributions. 2020 minimum required contributions for single-employer retirement plans are delayed until 2021.
  • Charitable Deductions – As a taxpayer who itemizes deductions; make sure to drop off your used clothing or furniture, write checks to your favorite charities, or donate stock to a non-profit organization of your choosing. In the process of making these donations, do not forget to obtain the appropriate documentation to support the donations. If you are a taxpayer who does not itemize, the CARES Act allows for a taxpayer to take an above-the-line charitable deduction up to $300 in 2020. The CARES Act also modified the AGI limitations on charitable contributions to 100% for individuals and 25% of taxable income for corporations. Another powerful option for taxpayers who do not itemize is a Qualified Charitable Distribution (QCD) from their IRA account. This allows for the taxpayer to still donate to a charity of their choosing, while excluding the amount of the QCD from taxable income on their tax return instead of taking a charitable deduction.
  • Gifting – As a taxpayer, now is a good time to evaluate if you should be making year-end gifts. An individual can make a gift up to $15,000 and married taxpayers may gift $30,000 ($15,000 for each spouse) to any number of recipients without incurring any tax consequences. In order for the gift to count toward the 2020 tax year, gifts must be made by December 31, 2020. If made by check, the donee must also cash the check on or before December 31, 2020.
  • ROTH & 401(k) IRA Contributions – Taxpayers who are eligible to contribute to an IRA, 401(k) plan or a Keogh plan (if self-employed), and do not currently have such a retirement savings account, should consider setting one up.  Under certain circumstances the contributions for 2020 may be deductible. Making contributions with pretax income is a great strategy that can lower income by potentially putting you in a lower income tax bracket. Total contributions made to Roth IRAs cannot be more than $6,000 ($7,000 if you are age 50 or older). For 2020, employees can defer up to $19,500 into their 401(k) plan ($26,000 if age 50 or older). These contributions help reduce your current tax bill, while also saving for the future.

2020 Tax Reminders:

  • Economic Impact Payments - As a reminder under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, many eligible individuals received a one-time payment. The CARES Act calls these payments recovery rebates, and the IRS calls them economic impact payments. Eligible individuals were to receive a payment of $1,200 ($2,400 for joint filers) plus $500 for each qualifying child. The payment phases out for taxpayers with adjusted gross income (AGI) above $150,000 (for joint filers), $112,500 (for head of household), and $75,000 (for other individuals). It is reduced by 5% of the amount of the taxpayer’s AGI that exceeds those limits, phasing out for individuals once their AGI reaches $99,000 ($198,000 for joint filers). If you were eligible and received a payment, this will be treated as an advance refund of a 2020 tax credit.
  • Meals & Entertainment - The final regulations concerning the deduction for meals and entertainment has been issued and here is what you need to know as a business owner. The final regulations provide that the term entertainment does not include food or beverages, unless they are provided at or during an entertainment activity and the costs of the food or beverages are not separately stated. It is important to keep in mind to separate entertainment related expenses from actual meals, to ensure you are maximizing your deduction.
  • Self-Employed Tax Credits for Sick Leave and Paid Leave – As a reminder for self-employed taxpayers, the Families First Coronavirus Response Act (FFCRA) gave certain employers payroll tax credits. These tax credits equal 100% of the qualified family leave wages and 100% of the qualified sick leave wages paid by the employer for certain COVID-19 related paid family leave, as well as paid sick leave. Additionally, the act provided eligible self-employed individuals with a refundable credit against income tax for qualified family leave or qualified sick leave amounts.

As the year comes to a close, there are many considerations regarding tax planning and the 2020 filing season. While every taxpayer has their own scenario, these are strategies and reminders to consider before year-end. Please contact your Dermody, Burke & Brown advisor if you would like to discuss any tax planning ideas or have any questions as we head into 2021.

 

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.

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