This year has been an unprecedented year for us all, and we have faced unforeseen challenges in the wake of the pandemic. To attempt to alleviate a portion of the financial impact from the pandemic, the government passed the Coronavirus Aid, Relief & Security Act (the “CARES Act”) and continued to implement the taxpayer friendly Tax Cuts and Jobs Act. Many incentives from the CARES Act expire in 2020, so financial decisions you make between now and the end of the year can have a significant effect on how much tax you will have to pay. This newsletter highlights some of the significant planning opportunities available to minimize your tax obligations.
After a contentious election season, nearly all media outlets have declared that Joe Biden will be the 46th President of the U.S. However, the legislative outlook is far from clear as the control of the Senate is still undecided. Thus, the extent of tax proposals that President-Elect Biden can enact depends largely on the outcome of Georgia’s Senate runoff elections. Due to this uncertainty, and the fact that any tax policy changes may not take effect until 2022, it may be wise for most to wait until the outcome of the Senate elections is clear before undertaking any major planning decisions based on President-Elect Biden’s proposed tax plan.
NEW COVID-19 LEGISLATION:
1. Tax Considerations for Recipients of Stimulus Payments
The CARES Act also included a $1,200 tax credit for the 2020 tax year that was paid to individuals in advance in the form of an economic income payment. The amount that an individual received was based on their individual income amounts for either 2019, or 2018 if they had not yet filed their 2019 tax return. If a second round of stimulus payments is authorized there is a chance, if the legislation is delayed far enough into 2021, that the phase out amounts will be based on 2020 income amounts. Because of this, some taxpayers may want to delay income until 2021 in order to maximize the amount of a potential second round of stimulus payments. For the previous round of stimulus payments, the phaseout amounts began at an adjusted gross income of $150,000 for taxpayers who file married filing jointly, $115,000 for taxpayers filing head of household, and $75,000 for individuals using any other filing status. Most likely the phaseout amounts for a second round of stimulus payments would be around the same amounts.
TAX PLANNING FOR INDIVIDUALS:
1.Taking Advantage of Changed Rules for Charitable Deduction
The CARES Act changed the rules for charitable deductions for 2020. The first change allows an above-the-line deduction of up to $300 for taxpayers who do not itemize deductions on their 2020 return. This deduction is for cash contributions made to certain qualifying Section 501(c)(3) public charities. Second, the charitable cash contribution adjusted gross income (AGI) limitation for taxpayers who itemize their deductions in 2020 was temporarily raised from 60 % to 100 %.
2. Claiming Education Credits & Deductions
Additionally, taxpayers will want to maximize education credits and deductions in 2020. Unless additional legislation stating otherwise is passed, the tuition and fees deduction will not be available anymore starting in 2021. Individuals can claim a credit or deduction for tuition paid in 2020 even if it is for an academic period starting in 2021, as long as the period begins before March 31, 2021.
3. Other Strategies to Consider
Other year end strategies to consider in order to maximize deductions include increasing 401(k) contributions and IRA contributions. Individuals that are eligible for IRA contributions can claim deductions for amounts contributed through April 15, 2021. Additionally, some individuals may want to go ahead and schedule any elective medical procedures (that are not purely cosmetic) for before the end of 2020. The floor for deductible medical expenses is 10% in 2021 compared with 7.5% for 2020. While generally pushing deductions to 2021 would take advantage of potentially higher tax rates, the higher floor on the deduction for medical expenses may undermine any benefit.
TAX PLANNING STRATEGIES FOR BUSINESSES:
1. Taking Advantage of Reduced Limitations on Net Operating Loss Carrybacks
The CARES Act also temporarily reduced limitations on a company’s use of losses. The Act provided that a net operating loss (“NOL”) arising in a tax year beginning in 2018, 2019, or 2020 can be carried back for five years. In addition, taxpayers can offset historic net operating losses against income without limitation in those tax years.
2. Taking Advantage of the Increased Limitation on Charitable Contribution Deduction
The CARES Act also increased the limitation on corporations’ deduction for charitable contributions from 10% of taxable income to 25% of taxable income. Again, this increase is limited to the 2020 tax year only.
3. Claiming the Business Interest Expense Deduction
The CARES Act increased the limitation on the business interest expense deduction for the 2019 and 2020 tax years from 30% of adjusted taxable income to 50% of adjusted taxable income. The business interest expense deduction will go back down to 30% in 2021.
4. Claiming Unused Alternative Minimum Tax Credits
When the Tax Cut and Jobs Act (TCJA) repealed the corporate alternative minimum tax (AMT), it allowed corporations to claim all their unused AMT credits in the tax years beginning in 2018, 2019, 2020 and 2021. The Coronavirus Aid, Relief, and Economic Security (CARES) Act accelerates this timeline, allowing corporations to claim all remaining credits in either 2018 or 2019. This gives companies several different options to file for quick refunds.
5. Claiming Depreciation Deduction & Expenses Either this Year or in a Later Year
TCJA provided generous depreciation and expensing limitations. Businesses may want to take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the year. Internal Revenue Code Sec. 179 expensing has an investment limitation of $2,590,000 for 2020, with a dollar limitation of $1,040,000. While these provisions do not only apply to tax year 2020, a business that has been considering expanding capacity or acquiring new equipment may want to go ahead and do so this year.
GIFT AND RETIREMENT PLANNING
1. Maximizing Unified Credit Before Potential Tax Law Changes
The current unified credit amount of $11,580,000 for individual gift and estate taxes (adjusted annually for inflation) is not scheduled to expire until 2026. However, the new administration has indicated that this exclusion may be scaled back sooner than that. Therefore, it may be worth considering gift and estate planning options, even if you fall under the current unified credit amount of $11,580,000, to maximize the current unified credit before it goes away.
2. Required Minimum Distributions for Retirement Accounts
Required minimum distributions for 2020 are waived for individual retirement plans (IRAs) and certain defined contribution plans. Additionally, the CARES Act eliminated the 10% early distribution penalty for participants under 59½ for certain coronavirus-related distributions. In addition to the penalty waiver, no 20% default income-tax withholding will apply to the coronavirus-related distribution. The CARES Act also extended the time to pay back outstanding loans from retirement accounts by one year if the due date for the loan falls between the March 27, 2020 and December 31, 2020.
If you have any questions related to tax planning for tax year 2020, please do not hesitate to contact us at (404) 365-5682.