2020 Tax Planning
Now is the time to review your tax planning approach before year end.
Below is a list of tax planning tips to consider before the end of year.
- Out-of-pocket medical expenses that exceed 7.5% of your gross income are deductible as an itemized deduction. If your year-to-date medical expenses are already close to this threshold, consider having elective procedures that you’ve been putting off and also make payment before year-end.
- State taxes are deductible up to $10,000. This includes a tax on real property, automobiles, and wages. If you are making quarterly state estimated tax payments, consider making the fourth-quarter payment before year-end, rather than on January 15th.
- Make your January 2021 payment in December 2020.
- Home mortgage interest is deductible for amounts paid on loan principal up to $750,000, or $1,000,000 if the loan originated before December 14, 2017.
- If you normally don’t itemize deductions, because your deductions don’t exceed the standard deduction of $12,400 ($24,800 on a joint return), consider making your planned charitable donations for both 2020 and 2021 in December of 2020. This may put your itemized deductions over the standard deduction for 2020.
- If you contribute appreciated assets, such as stocks or shares in mutual funds, that have been held at least one year, you can deduct the fair market value of the stock at the time of the gift. The appreciation on the donated shares is not taxable to you.
- Consider establishing a Donor-Advised fund. This allows a larger charitable deduction this year, and flexibility to distribute smaller annual amounts to charities over many future years.
- If you take the standard deduction, you can still claim and deduct up to $300 of cash donations.
Estate Planning and Gifting
- Currently, the lifetime exemption is $11.58 million for asset transfers made during your lifetime or at death. If you expect your estate to potentially exceed this amount, consider taking advantage of the historically high limits and making current gifts.
- Take advantage of the annual gift tax exclusion. You and your spouse can each give up to $15,000 per person in 2020 without it counting against your lifetime exemption. This means married parents can transfer up to $60,000 to their married child and spouse, free from gift tax.
- If you are thinking of selling appreciated securities and you held them for at least one year, the gain is taxed at long-term capital gains rates, rather than as ordinary income. The gains will be taxed at rates as low as 0% for those already in low income tax brackets, but not higher than 23.8% for higher-income taxpayers.
- Sell assets that have losses to offset the gains this year. But be aware of “wash sale” rules. Losses are disallowed if you purchase substantially identical securities within 30 days before or 30 days after the sale generating the loss.
- Municipal bond interest is excluded from Federal income tax. The interest may also be excluded from state income tax, if the bond is from your home state.
- REIT dividends and publicly traded partnership income are eligible for a 20% deduction.
- Review year-end Required Minimum Distributions from IRAs and consider skipping your 2020 distribution if you don’t need it, as the CARES Act has waived the RMD requirement for this year.
- If you were not yet 70½ in 2019 and you did not begin RMDs before 2020, you are not required to take your first RMD until the year of your 72nd
- If you are over 70½, consider making charitable donations directly from your traditional IRA to a charity. Direct transfers of up to $100K can be excluded from income, keeping your adjusted gross income lower.
- Maximize your 401(k) deferral by December 31st. You can defer up to $19,500, or $26,000 if you are 50 or over.
- Up to $100,000 may be distributed from your retirement account for specific COVID-related reasons without penalty. Generous taxation and repayment provisions exist.
- Maximize your SEP-IRA contribution for the lesser of 25% of net earnings from self-employment or $57,000. Contributions can be made through October 15, 2021, if your tax return is extended.
HSAs and FSAs
- Use the remaining balance of your flexible spending account before year-end, if you are not able to carry over the balance to next year.
- Contribute the maximum $2,750 per individual to a healthcare flexible spending account and the maximum $5,000 to a dependent care flexible spending account.
- If you start coverage under a high-deductible health insurance plan, eligible for an HSA, you and your employer can contribute a total of $3,550 for individual coverage or $7,100 for family coverage. If you are over 54, you or your employer can contribute an extra $1,000. Contributions can be made through April 15, 2021.
- Contribute to your child’s or grandchild’s 529 account. Contributions to a qualified Colorado-based plan are deductible on your Colorado income tax return, saving you55% of the contribution.
Withholding & Estimated Payments
- Hanson&Co. can help to project your 2020 Federal and state tax liabilities so that you can adjust your wage withholding or estimated payments as needed.
- Remember that 4th quarter Federal and state estimated tax payments are due January 15, 2021.
- Many new and used asset purchases and tenant improvements qualify for 100% bonus depreciation. Consider making acquisitions prior to year-end.
- Pass-through Income from many businesses may qualify for a special 20% income deduction.
- Accelerate deductions and defer income. For cash-basis, calendar-year businesses, pay anticipated January 2021 expenses this year and delay your invoicing for December until January 2021.
- Assemble payroll and business records for PPP loan forgiveness applications.
- If you received a PPP loan, make sure that the funds are spent on eligible expenses before December 31, 2020.
- Net Operating Losses generated in 2020 are eligible for a 5-year carryback and do not have a net income limitation.
- Excess business losses are limited starting on January 1, 2021. If you have net business losses exceeding $250K ($500K on a joint return), the excess will not be currently deductible but will carry forward to the subsequent tax year.
These tax tips are designed to limit income taxes, but some have potential pitfalls that should be reviewed by a CPA before implementation. In addition, it’s important to let your CPA know about any life events which occurred during the year as they may impact tax planning efforts. For additional information on the tips provided above or to schedule a tax planning review, call us at 303-388-1010. We look forward to speaking with you soon.