As of the day this article was written, there are only 29 days remaining in 2020. If you want to minimize the amount you will owe in taxes this year you need to act soon.
Combining the Tax Cuts and Jobs Act of 2017 (TCJA) with new COVID-19 CARES Act legislation, there may be ways to save that are not “on the radar”.
Before we get started, there are some general changes that occurred with the TCJA that you should keep in mind.
Individuals
For individual taxpayers, the good news is the that the standard deduction increased. The increased standard deduction may have some taxpayers foregoing itemizing deductions assuming they had done so in the past. For example, if you own a home but have no mortgage, you may no longer benefit from itemizing as the combined State and property tax deduction is now capped at $10,000. The child tax credit increased, and AMT limits are now much higher.
On the negative side as mentioned above, combined State and property taxes are now capped. Also, there are no more personal exemptions and several itemized deductions have been eliminated.
Businesses
As far as businesses go, the corporate tax rate which was as high as 35% is now a flat 21%. In addition, corporate AMT has been eliminated. New bonus depreciation rules allow up to 100% deduction in the year of purchase for many assets. Pass-through entities and other non-C corporation businesses may be able to take advantage of the Qualified Business Income deduction of up to 20% of net income.
Some additional benefits that the CARES Act added are as follows
- The 10% early-withdrawal penalty on retirement account distributions has been waived for individuals facing virus-related challenges. This is beneficial to anyone needed extra cash, regardless of age
- Some individuals that do not itemize may be able to deduct a portion of their charitable contributions (up to $300). This deduction is taken “above-the-line” indicating that even individuals that itemize may see an added benefit
- Certain employer payments on behalf of employees such as student loans may be excluded from taxable income.
- Businesses that experienced net operating losses (NOLs) in 2018, 2019 or 2020 may now carryback those losses going back five years. While the general rule allowed up to 80% of taxable income to be offset by using the suspended losses, the new legislation allows NOLs to fully offset any prior income recognized in the carryback.
- IRS Section 163(j) limits the amount of interest a company can deduct based on average gross income earned in the past three years (companies earning $25,000,000 or less are exempt). The prescribed cap in the amount of 30% of a company’s adjusted taxable income affected companies that were highly leveraged. Many of which need the full deduction the most. New legislation increased the 30% cap to 50%.
Traditional Tax Planning
In addition to tweaks stemming from the TCJA and the CARES Act, taxpayers can benefit from more traditional tax planning in which income is deferred or deductions are accelerated. Many deductions and tax credits are phased out as adjusted gross income (AGI) increases. If a taxpayer can fall below these phaseout thresholds, they receive a double benefit.
Below is a list of items to look at to see if you would benefit from tax planning…
- Taking advantage of the 20% deduction for qualified business income
- Utilizing expanded Code Section 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
- Disposing of passive activities to free up suspended passive losses.
If you think you may benefit from any of the programs listed above, contact us soon as time is running out. Call (800) 658-7590 or email us at info@taxresolutioninstitute.com.
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