September 16, 2020
The "new" deadline for filing 2019 taxes may have passed in July, but it is already time to think about 2020 taxes. By taking a mid-year look, we can plan and execute tactics to minimize tax liabilities.
Mid-Year Tax Recommendations for Individuals
The unique circumstances of 2020 may have opened additional options for individuals.
Make Smart Investment Moves
The stock market has experienced wild swings, with some stocks soaring and others spiraling. If there were realized short-term capital gains in 2020, which are subject to higher ordinary income tax rates, now might be the time to sell some of the "losing" stocks to offset those gains. Selling losing securities is a way to offset the short-term gains, as well as up to $3,000 of regular income.
Consider Making Charitable Donations
For 2020, you can deduct up to $300 of charitable contributions, even if you take the standard deduction and do not itemize. These contributions must have been made in the calendar year 2020 and must be cash contributions. For 2020, the limits on charitable contribution deductions will be suspended. Note this only applies for qualified cash contributions. For individuals, contributions are usually limited to 60% of adjusted gross income. With this suspension, cash contributions will no longer be limited. In other words, the full amount of cash contributions is deducted as an itemized deduction, regardless of income.
Minimum Required Distribution (RMD) Rules Suspended for 2020
The CARES Act suspended RMDs for the calendar year 2020. RMD requirements generally applicable to retirement plans are suspended for:
Relief Provided for Qualified Coronavirus-related Distributions
The 10-percent penalty is waived for any qualified coronavirus-related distributions of up to $100,000 made from an eligible retirement plan under the new CARES Act. To qualify as a "coronavirus-related distribution", it must be from an eligible retirement plan and made between March 27, 2020, and December 31, 2020. There are also stipulations relating to the individual taking the distribution to avoid "adverse financial consequences." The distribution may be repaid to the plan within three years, or the inclusion in income is taxed ratably over a three-year period (if elected).
Access 401(k) Funds with Fewer Restrictions
To help individuals struggling to make ends meet, the CARES Act eased the rules for 401(k) plan loans taken between March 27, 2020, and September 23, 2020. Plan participants can borrow up to 100% of their vested benefit, rather than the usual 50%. The loan is limited to a maximum of $100,000, which was increased from $50,000. We only recommend using 401(k) funds as a last resort. Individuals should consider all other available options before borrowing against retirement savings.
Dependent Care Adjustments
Parents of minor children faced struggles this year finding childcare when schools, summer camps, and daycares shut down. If already utilizing the pre-tax benefits of dependent care reimbursement through the employer's Section 125 plan, parents might be able to make mid-year changes to their payroll deduction election to help handle the fluctuations of daycare costs.
Mid-Year Tax Recommendations for Small Business Owners
Much like individuals who have some additional tax strategies available in 2020, business owners may experience some tax benefits from an otherwise unfortunate situation.
Catch Up on Your Estimated Quarterly Payments
Those making estimated quarterly tax payments were allowed additional time to pay the first two-quarters of 2020 estimated tax. If estimated tax payments haven’t already been made, now is the time to evaluate circumstances and catch-up on payments to avoid additional underpayment penalties and interest.
Payroll Tax Credits
The Employee Retention Credit is a credit against an employer's portion of the 6.2% Social Security tax for eligible businesses that were forced to suspend operations during any quarter in 2020 due to the COVID 19 crisis or had a greater than 50% decrease in gross receipts compared to the same quarter of the previous year (Q2 2020 vs. Q2 2019 for example). Tax-exempt organizations may also qualify for this credit if they meet the criteria above. The credit is equal to 50% of qualified wages plus qualified health plan expenses (up to $10,000 of qualified wages for each employee plus allocable health care costs) for each quarter the business qualifies. The credit will be large initially, but many employees will cap out at the $10,000 in qualified wages quickly. The credit goes away when a business's gross receipts in a quarter are equal to or greater than 80% of the prior year comparable quarter. The credit is not allowed for any business that takes out a Payroll Protection Loan or receives Work Opportunity Credits. The IRS has now published Form 7200, Advanced Payment of Employer Credits Due to COVID-19 that can be used to request an advance of the credit before you file your quarterly 941.
Additionally, the CARES Act allows employers to defer the deposit and payment of the employer's share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes for up to two years. While the CARES Act applies to the employer's portion of the social security tax, an executive order signed on August 8 of 2020 permits employers to defer the withholding, deposit, and payment of the employee's portion of social security tax. This optional payroll tax deferral applies to employee wages paid between September 1 and December 31 of 2020 and only for employees making less than $4,000 during a bi-weekly pay period.
Self-employed persons that have been working from home can take a deduction for their home office. If self-employed individuals use their home exclusively for business, they can deduct a portion of their rent or mortgage interest, insurance, property tax, and utilities. If accumulating these monthly bills seems too daunting, consider using the simplified method for the home office deduction, $5 per square foot of home used for business up to a maximum of 300 square feet.
All of the chaos of 2020 shouldn't have an adverse effect on taxes. Thorough planning before the year-end can help deal with the volatility we're all facing. Avoid leaving the future up to chance with proactive mid-year planning solutions that can help minimize tax liability and maximize cash flow.
A special thanks for the collaborative efforts of the BT&Co. team.
The Ignite blog is an official publication of the Kansas Society of CPAs, Copyright 2020.
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