In the last year there have been numerous changes in tax legislation with the most recent, Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by the current administration. However, some of these major laws are only temporary and will soon expire, except for provisions that have been extended. All the ups and downs of this year have shown that preparation for the future is not only recommended, but necessary. With a new president coming into office, there is the possibility for further fluctuations in tax legislation.
Planning for Your Personal Income Tax Filing
Individuals should take into consideration the following to lower their income tax bill in 2020:
- Make the Standard Deduction Work for You
- Currently the standard deductions are $12,400 for singles and married filing separate, $24,800 for married filling joint, and $18,650 for heads of households.
- If your 2020 total itemized deductions are near the thresholds of the standard deduction, then consider some of these suggestions to help lower your income tax bill.
- Accelerating mortgage payments to allow for thirteen months of interest for 2020.
- Prepay 2021 state and local income and property taxes. Maximum amount deductible is still $10,000 ($5,000 MFS).
- Make additional charitable donations.
- Contributions to Traditional IRA
- Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the removal of the age restrictions has allowed those who are working over the age of seventy and a half to continue to contribute to their traditional IRA.
- Monitor Gains and Losses from Investments in Taxable Accounts
- There is a tax advantage for selling appreciated long-term securities since the maximum federal income tax rate on qualified dividends and long-term capital gains is 20% for most, and possibly 15% (or even 0%) for those in lower income tax brackets.
- Be cautious: The Net Investment Income Tax (NIIT) of 3.8% can apply to individuals in higher tax brackets.
- Tax advantages on investment income
- For single individuals, long-term capital gains and qualified dividends from securities held in taxable accounts can be taxed at 0% if adjusted gross income (AGI) is $40,000 or less. The thresholds increase for head of households and joint filers to $53,600 and $80,000, respectively.
- If your income exceeds those limits, then consider giving appreciated stock or mutual fund shares to other relatives (children, grandchildren, etc.) in the lower tax brackets as they can take advantage of selling the stock and pay at a 0% income tax rate on the gain.
- Changing Traditional IRAs into Roth Accounts
- The Tax Cuts and Jobs Act (TCJA) of 2017 lowered tax rates through 2026, but changes could happen sooner due to the results of our recent presidential election. If you expect your 2020 income to be lower than in the past or are concerned about a tax rate increase, this may be the time to consider converting your traditional IRA to a Roth IRA.
- Setup a College Savings Funds for Dependents/Beneficiaries
- 529 plans were expanded by the Tax Cuts and Jobs Act (TCJA) to cover savings for public, private, and religious school tuitions, including elementary and secondary schools.
- Contributions are not deductible at the federal level, but part or all may be tax-deductible at the state level depending on your state.
- Earnings from a 529 are not subject to federal tax, and distributions are not taxed if they are used for qualified educational expenses for the student or beneficiary.
- Intrafamily Loans
- Historically low interest rates allow family members to loan money to one another in a tax-efficient manner.
- Applicable Federal Rate (AFR) is the minimum rate that can be charged by a lender of any type, including family members. Charging no interest rate or below the AFR may make loans subject to gift tax.
- Should you choose to gift as an alternative to a loan, individuals can utilize the annual and lifetime gift exclusions.
Tax Planning for Small Businesses
- Net Operating Loss (NOL)
- If your small business is expecting a loss, you have the option to carry-back five years or carry-forward to the following years (maximum of twenty).
- If you have an NOL carrying-forward to 2020, then you can claim a deduction up to 100% of your 2020 taxable income.
- Tax Favored Retirement Plans
- Current plans allow for substantial deductible contributions and credits.
- For self-employed individuals, a SEP-IRA is available with 20% maximum contribution up to $57,000.
- Depreciation Tax Breaks
- For qualified new and used property that is acquired and placed in service during 2020, you can take 100% first year bonus depreciation. This includes heavy SUVs, Pickups, or Vans that weigh more than 6,000 pounds.
- For cars, light trucks, and light vans that cost $58,500 or more, the luxury auto depreciation is $18,100 for year 1, $16,100 for year 2, $9,700 for year 3, and $5,760 for year 4, allowing the vehicle to be depreciated in only four years, with higher depreciation in the early years.
- Business Interest Expense Limit
- For 2020, the 30% deductibility limit has been increased to 50% of your Alternative Taxable Income due to the CARES Act. This limit applies to businesses whose average annual gross receipts exceed $26 million for the most recent three-year-period.