2020 Tax Minimization Tips

Thursday, September 24, 2020

Original article from Fuoco.com >

There is no question that higher taxes for wealthy might be in the cards post-pandemic. This is not the time to take tax planning lightly – tax minimization is more important than ever. The pandemic has us in a panic about our health and our wealth as it has changed the world as we know it, do not take anything for granted, especially your finances.

States and the federal government will be looking to refill their coffers with tax revenues the longer COVID drags on and further depletes them. A reduction in the federal estate and gift tax exemption might be in play. There may be talk of increasing tax rates on the highest brackets, and taxes on investments. Loss “harvesting” will become even more attractive with higher capital gains tax rates.

Be ready for the “new normal” by looking for opportunities and rethinking your tax planning. For example, you might consider converting a traditional IRAs into Roth IRAs, or decide to take advantage of transferring or selling assets. Estate planning techniques such as inter-family loans or grantor retained annuity trusts to remove future appreciation and avoid estate, gift and generation-skipping transfer taxes in the future, might be wise to consider. And of course there is the tried and true: You might wish to accelerate your income into this year and postpone your deductions until next year if you expect to be in a higher marginal tax bracket next tax year, or if you know you’ll be using a less favorable filing status next year.

Here are the top 2020 tips from our tax experts:

  • The CARES Act waived required minimum distributions (RMD) this year. Small-business owners who are falling into lower income tax brackets due to the effect of the Coronavirus on their business might pay less to convert their traditional tax-deferred IRAs into tax-free Roths now, to get an overall lower tax bill on retirement monies in the future.
  • The SECURE Act raised the age for RMDs to 72. It also allows owners of traditional IRAs to make contributions past the age of 70½ starting in 2020. In addition, folks having a baby or adopting a child can now take payouts from IRAs and 401(k)s of up to $5,000 without having to pay the 10% fine for pre-age-59½ withdrawals.
  • Keep Roths top of mind because the SECURE Act did away with stretch IRAs, which forces those who inherited individual retirement accounts to remove their funds within 10 years rather than stretching out the distributions over time, you want to get money out of taxable funds at lower brackets. Best utilized for those under age 60, and with the watchful eye of your Fuoco Group CPA.
  • If realizing long-term capital gains plays a significant role in how you will fund your retirement lifestyle next year, it may be cheaper to take those gains in the 2020 tax year rather than wait until 2021.
  • Harvesting positions in your taxable portfolios will help offset/reduce any realized gains you may have this year. Try to keep excess losses to $3,000, as losses beyond that figure carried into future tax years may be less valuable.
  • Consider tax-efficient succession planning due to lower valuations tied to the pandemic, lower interest rates and the uncertainty as to whether the current lifetime gift tax exemption of $11.58 million will continue post-election. Transfers to younger family members have tax advantages: income generated by the assets shift to individuals with a lower tax rate, and moving assets to other family members can be a good strategy for lowering estate taxes. Assets transferred during the life of an owner may be lower than at the owner’s death, when the cost basis normally is stepped up to fair market.
  • You can make non-taxable gifts to your beneficiaries at a maximum of$15,000 per recipient. $30k for you and a spouse.
  • Got a new grand-kid? Section 529 college savings plan rules allow them to front-load the equivalent of five years in annual gifts — or $75,000 ($150,000 per couple) — to this type of tax-free account.
  • The CARES Act added a new above-the-line deduction to encourage charitable giving. If you take the standard deduction on your 2020 tax return, you can deduct up to $300 for cash donations to charity you made during the year. Donations to donor advised funds and certain are not deductible.
  • Contribute to your IRA to boost your retirement savings and trim your tax bill at the same time. The contribution limit is $6,000 ($7,000 if you’re 50 or older) for 2020. You may make 2020 IRA contributions up until April 15, 2021.
  • The maximum 401(k) contribution for 2020 is $19,500, but if born before 1971, you can put in $6,500 more. The caps apply to 403(b) and 457 plans as well. This year's cap on contributions to SIMPLE IRAs is $13,500 ($500 more than last year), plus $3,000 extra for people age 50 and up.
  • You get an above-the-line deduction for contributions to your HSA, assuming you made them with after-tax money, and have a high deductible health care plan. Maximum contribution amounts for 2020 are $3,550 for self-only and $7,100 for families. The annual “catch- up” contribution amount for individuals age 55 or older will remain $1,000.
  • Considering solar? The residential solar credit falls to 26% for 2020,and drops again to 22% next year and ends after 2021.
  • The 2020 threshold for deducting medical expenses on Schedule A is 7.5% of AGI. The mileage allowance for medical travel is 17¢ a mile in 2020. The limits on deducting long-term-care premiums are higher in 2020.
  • A key dollar threshold on the 20% deduction for pass-through income was increased for 2020. The threshold amounts for 2020 are $326,600 if you are married filing jointly or $163,300 if you are single, head of household, or married filing separately.
  • If you have mutual fund dividends automatically reinvested to buy more shares, remember that new purchases increases your tax basis in the fund which reduces taxable capital gains when shares are redeemed. A costly mistake is forgetting to include reinvested dividends in your basis which results in double taxation of the dividends (when paid out and reinvested, and again when included in the proceeds of the sale).
  • Did you buy a home? Don’t forget you get to deduct the points paid to get your mortgage.
  • Check with us if you have college tuition to pay – depending on your income level, you may be missing out on the American Opportunity Credit, the Lifetime Learning Credit, student loan interest deductions, or 529 plan opportunities.
  • Should the corporate tax rate jump to 28% and bonus depreciation be cut, companies with gains may wish to sell their assets before the year ends. Others may be interested in buying assets to take advantage of the bonus depreciation, before it is cut.
  • Not working in the office, but from home? Your vacation home in another state? Make sure you are not taxed twice due to telework! State income tax is withheld and paid to the state in which the taxpayer’s services are performed, not necessarily the state in which the employee resides. Many different laws can kick in when different states try to tap non-residents for income taxes. Exceptions can apply for states that do not have an income tax or have reciprocal agreements. Track the number of days at each location where work is performed and save your documents to establish proper tax reporting and residency. Work with your employer to ensure adequate withholdings for the correct state.
  • Work for yourself? You have to pay both the employer and the employee share of Social Security and Medicare taxes, but at least you get to write off half of what you pay as an adjustment to income. You can also deduct contributions to a self-directed retirement plan such as a SEP or SIMPLE plan. Also deductible as an adjustment to income: the cost of health insurance for the self-employed (and their families)—including Medicare premiums and supplemental Medicare, up to your business’ net income.
  • Don’t forget state sales tax. This deduction is particularly important if you live in a state that doesn't impose a state income tax.
  • If you itemize, you may be able to deduct your gambling losses from the casino or race track, etc., but it is limited to the amount of gambling winnings you report as taxable income. • Be sure to let us know if you have a new baby or a dependent parent this year. It could mean tax savings! You may be eligible for the Child Tax Credit offering up to $2,000 per qualifying dependent child 16 or younger. There is a $500 nonrefundable credit for qualifying dependents for older children and elderly relatives. Child and Dependent Care Tax Credits may come into play as well.
  • Last but not least – Remember that rebate check you got? Most clients received economic recovery rebate payments of $1,200 ($2,400 for couples filing jointly), plus $500 more for each child under age 17. Technically, the rebate is an advance payment of a special 2020 tax credit to be reconciled on your 2020 return.