As this very unusual year comes to a close, we can look forward to the prospects and challenges waiting for us next year. Until then, there are many tax planning opportunities available to individuals and business entities that can be implemented before December 31, 2020.
Congress is currently working on another stimulus package with provisions that will provide assistance to business entities and no significant tax changes for individuals. It is uncertain if this legislation will be enacted before the end of the year. Watch our website for further details.
Please contact us to discuss any of the ideas discussed below.
Year-End Ideas for Individuals
- The incoming Biden administration has proposed significant changes to current tax policy including increasing both individual and corporate tax rates and the elimination of capital gain tax rates for high-income taxpayers. At this time it is uncertain which proposals will actually be enacted and when they will be effective. If you value certainty, accelerating income into 2020 will lock in taxation at current tax rates. Consider deferring deductions as they will be more valuable if tax rates increase in 2021.
- Converting traditional IRA funds into a ROTH IRA can provide future tax savings and can be done at a low tax cost if taxpayers are in low tax brackets this year due to reduced income.
- If you were working at home during 2020, deductions may be available for a “home office”. Only self-employed taxpayers may qualify for both federal and California deductions but employees may qualify for a California deduction.
- Selling investments to realize capital losses can offset your capital gains but beware of the 30-day wash sale rule.
- Consider investing in a Qualified Opportunity Fund to defer tax on capital gains until 2026. Gains realized after October 5, 2019 are currently eligible for deferral. However, gains realized in 2019 would require an amended return to claim the benefit of the deferral.
- Be charitable – Taxpayers not itemizing deductions are eligible for a $300 charitable contribution deduction and itemizers can claim deductions up to 100% of their adjusted gross income for cash donations to public charities (excluding contributions to donor-advised funds).
- Donations to donor-advised funds remain deductible up to 30% of adjusted gross income with any excess carried forward. Appreciated securities held over one year can be contributed and generate a deduction equal to their market value avoiding any tax on the gain.
- The gift tax exemption may decrease in future years so gifting now before the exemption is reduced can minimize a taxable estate and shift appreciating assets to children subject to lower tax rates.
- The low-interest rate environment creates opportunities for shifting wealth by creating new or refinancing existing intra-family loans.
- With the high gift tax exemption and low-interest rates, now is the ideal time to look at establishing a Grantor Retained Annuity Trust to transfer assets out of your estate. Future tax policy may restrict the use of GRATS.
- Recently enacted California Proposition 19 significantly changed the property tax reassessment rules for real property or farmland that is received from gifting or inheritance. Gifts made prior to February 15, 2021 will be reassessed under the pre-Prop 19 rules which were more taxpayer friendly.
- If an individual, spouse, or dependent is diagnosed with COVID-19 or is otherwise economically harmed, the individual can withdraw up to $100,000 from their IRA, pension plan, or 401(k) in 2020 without incurring the 10% early distribution penalty. The distribution will be taxed ratably over three years and can be re-contributed back into a qualified retirement plan during the three-year period creating an opportunity for the refund of tax previously paid.
- Required Minimum Distributions from retirement plans have been suspended for 2020 and the age for required distributions increased to 72.
- There is no longer an age limit to making IRA contributions. Taxpayers of any age with wages or self-employed income can fund a contribution.
- Evaluate IRA beneficiaries as non-spousal beneficiaries of an inherited IRA must withdraw funds within 10 years rather than over their lifetime.
- Teleworking employees may face additional tax filing requirements and state taxes if working from a state that is not their pre-pandemic work location.
Year-End Ideas for Business Entities
- The incoming Biden administration has proposed significant changes to current tax policy including increasing both individual and corporate tax rates and the elimination of capital gain tax rates for high-income taxpayers. At this time it is uncertain which proposals will actually be enacted and when they will be effective. If you value certainty, accelerating income into 2020 will lock in taxation at current tax rates. Consider deferring deductions as they will be more valuable if tax rates increase in 2021.
- The receipt of a PPP Loan can impact year-end planning. Under current guidance taxpayers with a reasonable expectation of loan forgiveness cannot deduct expenses paid with loan proceeds that will be forgiven. Congress may modify this rule.
- Federal 100% bonus depreciation is available for fixed assets acquired in 2020. Year-end asset purchases can reduce taxable income and unlike first year expensing under Section 179 can create a loss for the year. Assets placed in service near year-end can still qualify for 100% bonus depreciation deductions.
- Review your depreciation schedule for 2018 and 2019 acquisitions that are Qualified Improvement Property (generally, leasehold improvements made to nonresidential buildings). These assets are now eligible for bonus deprecation. Any depreciation catch-up can be claimed on your 2020 tax return.
- A cost segregation study for newly purchased (or existing) real property can result in significantly increased tax deductions since bonus depreciation is available. The study would identify specific assets with “short” depreciation lives eligible for bonus depreciation.
- Maximize business losses since Net Operating Losses from 2020 can be carried back 5 taxable years to generate a refund of taxes previously paid. The limitation on “excess business losses” from pass-through entities has been repealed for 2020 but returns in 2021 so large losses from pass-through entities may be deducted in 2020 and possibly create a Net Operating Loss that can be carried back.
- If your pass-through business qualifies for the Qualified Business Income Deduction look at yearend bonuses to increase W2 wages and potentially the maximum allowed deduction.
- Consider the benefits of establishing a retirement plan for your business. Qualified plans can now be established after year-end. Plan sponsors can then fund contributions that are deductible in the prior year.
- Review activity during the year for possible “disaster losses” such as store closures, disposal of unsaleable inventory or supplies, lost payments for canceled events, abandonment of pending business transaction. These losses may be deductible in 2020 or claimed in 2019.
- If year-end receivables have decreased from last year there may be tax savings to switch to the accrual method in 2020 from the cash method.
- Entities with no gross receipts in 2015 and prior years may be eligible to use their 2020 federal R & D credit to offset employer payroll taxes.