Year-end Individual Tax Planning Complicated by COVID-19 Relief Measures and Tax Credits

Time for Taxes Money Financial Accounting Taxation Concept

2020 Presidential Election May Also Have an Impact

By Susan Day, CPA

Year-end tax planning may be dramatically different this year due to the myriad of federal aid measures aimed at the COVID-19 pandemic, and consideration of the 2020 presidential election results. Taxpayers must consider not only the pandemic-related aid they and their businesses may have received this year but also how they may be impacted by any changes in tax policy from a new Presidential administration.  Tax considerations this year, while important, may rightfully be overshadowed by decisions being made for medical and health care needs.

Following are several key factors for year-end tax planning for individuals and businesses. Tax planning often means determining whether to accelerate or delay income or deductions.  There are many other factors to consider depending on your unique circumstances.  Now is a good time to set up a meeting with your Adams Brown tax advisor.

Year-end Tax Planning for Individuals

  • Know your numbers
    • A key aspect of tax planning is estimating both 2020 and 2021.
    • Know your tax bracket. Your tax bracket can play a large part in determining your capital gains tax rate, whether you pay net investment income tax, the taxability of social security benefits, and other credit limitations.  
    • Know your AGI (adjusted gross income). Many tax benefits are tied to this number.  For example, IRA deductions and education credits are impacted by your AGI.   
  • Charitable contributions: It’s a good year to give
    • Take the above-the-line charitable tax deduction.  For the 85% of taxpayers who do not itemize, the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in March 2020 allows taxpayers to take an above-the-line deduction up to $300 for cash charitable contributions made in 2020.
    • The CARES Act also eliminates the limit on deductions of charitable contributions made by taxpayers who itemize.  Contributions that exceed established deduction limits can be carried over for up to five years. If you are able to itemize, bunching contributions can be a good strategy.
    • Additionally, taxpayers over age 70½ may make charitable distributions from their individual retirement accounts of up to $100,000 to qualified charities and avoid including those distributions in taxable income. This applies even though the CARES act suspended required minimum distributions (RMDs) for 2020. Contributions must be made on or before December 31, 2020, to qualify for these provisions.
  • Understanding the impact of your stimulus check
    • Under the CARES Act, qualified taxpayers received stimulus checks from the U.S. Department of the Treasury for $1,200 plus $500 for each qualified child dependent. The payments were based on information reported on 2018 or 2019 tax returns. These stimulus payments were structured as advance payments of 2020 tax credits. The credits phase out for higher-income taxpayers, so it is important to understand that the check you received based on your 2018 or 2019 tax return won’t necessarily match the amount of the credit that will be calculated on your 2020 return. The good news is if you received too much credit, you won’t have to pay it back.  If you didn’t receive enough credit, you will claim it on your 2020 return.
  • Review withholdings, estimated taxes, and marital status
    • Review withholdings for the current year and consider other nonwage income for which there may not have been withholding. Consider the need to make estimated tax payments to avoid underpayment penalties.  
    • Consider the tax impact of your year-end marital status if you got married or divorced this year. Status is determined as of December 31.
  • Review virtual currency transactions
    • The IRS is moving this question front and center on Form 1040. Make sure to consult with your tax advisor if you own or had transactions related to virtual currency.
  • Consider year-end gifts
    • A year-end gift of appreciated property can move taxable gain to family members in a lower tax bracket. As long as each gift is not more than $15,000 ($30,000 for joint gifts) it will not count against the donor’s unified estate and gift tax exemption.  Gifts must be made by December 31, 2020, and if made by check, generally won’t count if not cashed or deposited by the donee in 2020.
  • IRAs and retirement plans
    • Under the CARES Act, taxpayers can take up to $100,000 in coronavirus-related distributions from retirement plans without being subject to the typical 10% penalty tax for early distributions. Eligible distributions can be taken through December 31, 2020. Coronavirus-related distributions may be repaid over three years. For these purposes, an eligible taxpayer must have been diagnosed with the SARS-CoV-2 virus or COVID-19 or have a spouse or dependent who has been diagnosed with either illness, or must have experienced adverse financial consequences from being quarantined, furloughed, or laid off, or had work hours reduced, or be unable to work due to lack of child care.
    • Any resulting tax consequences due to income inclusion can be spread over three years, and if the distributions are paid back within the three-year time frame, a refund of any tax paid can be obtained. The Act also allows loans of up to $100,000 from qualified plans, and repayment can be delayed. The CARES Act temporarily suspended the required minimum distribution rules for 2020. The Act also delayed the 2020 minimum required contributions for single-employer plans until 2021.
    • Couple increased charitable contribution limits with IRA distributions. With the ability to deduct up to 100% of adjusted gross income to charity in 2020, taxpayers over age 59 1/2 can take advantage of withdrawing IRA contributions and donating to charity for a net-zero tax impact. (If you’re under 59 1/2, watch out for the 10% early withdrawal penalty). Consider offsetting income tax from a traditional IRA to Roth IRA conversion with charitable giving tax savings. To qualify, the donation must be made in cash directly to operating charities and does not include donations made to private foundations, supporting organizations, or donor advised funds.
  • Realize stock losses to offset gains
    • Review your ability to sell appreciated investments if you have realized capital losses this year. Remember there are offset rules: long-term capital losses first offset long-term capital gains, and short-term capital losses first offset short-term capital gains. 
  • Amend prior year tax returns
    • Several provisions of the CARES Act, as well as other legislative initiatives, are retroactive and could help many taxpayers compensate for financial losses during 2020 by filing amended prior year tax returns. They are broken down below:
      • Legislation passed at the end of 2019 permits possible benefits from amending prior year tax returns, including retroactive disaster relief provisions. The COVID-19 disaster is unusual because it has no clear time limit or geographic limit. Although it is fairly clear that as a federal disaster, taxpayers would have the option to claim the casualty losses on the prior year’s tax return, additional guidance is probably needed to clarify what would be considered qualifying expenses and for how long the disaster is considered to continue.
      • The Setting Every Community Up for Retirement Enhancement (SECURE) Act retroactively revised another change made by the TCJA requiring the “Kiddie Tax” to be imposed at potentially higher estate tax rates than the parents’ tax rates. Returns for 2018 and 2019 could be amended to claim the lower tax rate.
    • More than 30 regularly expiring provisions of TCJA were retroactively extended, creating an opportunity for both individuals and businesses to go back and claim revived tax breaks on prior tax returns. These expiring provisions were only extended through 2020 and have not yet been further extended at this point. Taxpayers in their year-end planning may want to consider the last opportunity to take advantage of those provisions in 2020 before they expire again.  
  • Finally, with the future of the Affordable Care Act once again before the U.S. Supreme Court, it may be advantageous for some taxpayers to file protective refund claims for any open tax years if taxes collected under the ACA, such as the 3.8% net investment income tax and the 0.9% Medicare tax, are declared unconstitutional.
  • Impact of the presidential election
    • The tax ramifications of the 2020 presidential elections will not be immediate, but a change in administration could signal changes to federal tax law next year. The ability to achieve higher tax rates for high-earning individuals, as proposed by President-Elect Biden, could mean that accelerating income into 2020 and deferring deductions to 2021 are a good strategy for some individuals. Click here for a full analysis of the presidential candidates’ tax proposals.