We hope that you and your loved ones are safe and healthy as you deal with the current COVID-19 crisis. What an incredibly difficult year this has been! This most recent tax season was unlike any we’ve ever experienced. With the spring deadline postponed until July 15, we’re still busy preparing returns. While it may seem odd to discuss 2020 midyear planning while you’re still waiting to file your 2019 tax return, there are many opportunities that should be addressed sooner rather than later.
In response to the COVID-19 emergency, President Trump signed into law on 3/27/20 the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is a massive piece of legislation aimed at providing much needed relief during an uncertain time in our country. Among its many provisions, the Act offers some immediate tax-saving opportunities.
In addition to the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act (Disaster Act) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act, both passed in December 2019, provide tax planning opportunities for this year. The Disaster Act extended (retroactively to 2018, in some instances) many beneficial provisions in the tax law that had expired or were set to expire. The SECURE Act, on the other hand, made significant changes to the retirement rules. We’ll highlight planning techniques stemming from these recent bills, as well as other midyear planning ideas.
It’s possible that additional COVID-19-related tax changes could be implemented as the year progresses. We also need to keep in mind that 2020 is an election year. While we don’t anticipate significant tax law changes if President Trump is reelected, a new occupant of the Oval Office would almost certainly lead to tax reform (with possible higher tax rates). As always, we’re paying close attention to the ever-changing tax environment to discover tax planning opportunities that could put more cash in your pocket. In the meantime, here are some ideas to evaluate this summer while you have time to think about them.
Individual Income Tax Opportunities
Here are some strategies that may lower your individual income tax bill and help with cash flow for 2020.
Consider Adjusting Your Tax Withholding or Estimated Payments. If you owed taxes for 2019, you may want to revise your Form W-4. To help you do this, consider using the IRS’s “Tax Withholding Estimator,” available at www.irs.gov/individuals/tax-withholding-estimator. If you make estimated tax payments throughout the year (you’re self-employed, for example), we can take a closer look at your tax situation for 2020 to make sure you’re not underpaying or overpaying. Also, if your 2019 return applied an overpayment to 2020, but you would now prefer a refund, you have until 7/15/20 to file a superseded return and request a refund.
Amended Returns. Ordinarily, an amended tax return is only filed when an error or omission is discovered after a return has been filed. With the current COVID-19 situation, any opportunity to put a little money back in your pocket is worth pursuing. All three of the major tax laws passed within the last six months contain retroactive provisions that could make amending your 2018 and/or your 2019 return (if already filed) worth the cost.
Take Advantage of Lower Tax Rates on Investment Income. Income from an investment held for more than one year is generally taxed at preferential capital gains rates. Those rates are 0%, 15%, and 20% for most investments. The rate that applies is determined by your taxable income. If possible, you should get your income low enough to qualify for the 0% rate. If your income is too high to benefit from the 0% rate, try gifting investments (like appreciated stock or mutual fund shares) to children, grandchildren, or other loved ones. Chances are these individuals will be in the 0% or 15% capital gains tax bracket. If they later sell the investments, any gain will be taxed at the lower rates, as long as you and your loved one owned the investments for more than one year. However, beware of the “Kiddie Tax,” which applies to all children under age 18 and most children age 18 or age 19–23 who are full-time students. It may limit your opportunity to take advantage of this strategy.
Retirement Plans. If you’re affected by COVID-19 and find yourself in need of additional cash flow, the CARES Act contains several taxpayer-friendly provisions for retirement plan distributions up to $100,000taken prior to the end of 2020. If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan.
Check Your Deduction Strategy. It’s best to itemize your deductions if you have significant personal expenses. However, don’t rule out the standard deduction. For 2020, joint filers can enjoy a standard deduction of $28,400. The standard deduction for heads of household is $18,650, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,400. If you’re able to itemize, please note that the Tax Cuts and Jobs Act (TCJA) (a major tax reform bill passed in December 2017) suspended or limited many of the itemized deductions.
Planning for Small Businesses
If you own a business, consider the following strategies to minimize your tax bill for 2020.
Net Operating Losses (NOLs). To assist small business owners who may have incurred losses as a result of the COVID-19 crisis, the CARES Act temporarily removed the TCJA limitation on NOLs. Because the new law is retroactive, you can now carry losses that originated in 2018 through 2020 back five years. This means you could carry a 2018 NOL back as far as 2013. Since tax rates were higher in 2017 and earlier years, carrying back an NOL should be much more beneficial than carrying that loss forward.
Excess Business Losses. The CARES Act also retroactively removed the limitation on Excess Business Losses (EBLs) that the TCJA implemented for 2018 through 2020. Under the TCJA, beginning in 2018, taxpayers were unable to deduct business losses from sole proprietorships or pass-through entities, such as partnerships and S corporations, if the combined loss exceeded $250,000 ($500,000 for married joint fliers). (Those amounts were adjusted annually for inflation after 2018.) The excess loss was converted to an NOL and carried forward, subject to certain limitations. Since this is a retroactive law change, if your losses were limited in either 2018 or 2019 (if that return has already been filed), you should strongly consider filing an amended return to generate a refund.
Business Interest Expense. The CARES Act relaxed the limitation on the deductibility of business interest expense. Under the TCJA, the deduction was generally limited to 30% of Adjusted Taxable Income (ATI). For 2019 and 2020, that limit is generally increased to 50% of ATI. Special rules apply to partnerships and their partners.
Better Depreciation Rules for Real Estate Qualified Improvement Property (QIP). The CARES Act includes a technical correction to the TCJA that is retroactive to 2018. The new rule allows much faster depreciation for real estate QIP that is placed in service after 2017.
Please Contact Us
As we said at the beginning, this information is to get you thinking about tax planning moves for the rest of the year. Even though the IRS continues to publish guidance on COVID-19-related developments, there are things you can do now to improve your tax situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session. Also be sure to visit our website regularly for COVID-19 related tax and business implication updates http://www.isdanerllc.com/covid-19-tax-business-implications/